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Cablegate: Thai Telecom Sector: Norway's Telenor Buys Out

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A


1. (U) SUMMARY: On October 20, 2005, Norway's Telenor
announced an indirect takeover of Thailand's UCOM and its
mobile phone subsidiary Total Access Communications (TAC).
The complex transaction paves the way for Telenor control of
Thailand's second-largest mobile phone operator. The
National Telecommunications Commission is reviewing the deal,
but appears unlikely to block it. If allowed, the buyout
promises to strengthen competition in the mobile telephone
services market, which will benefit consumers and the
nation's infrastructure. The deal will not likely open the
door to future cross-border buyouts in the telecom sector
anytime soon, however, because of the pervasive economic
nationalism within both the government and industry. END


2. (U) The Norwegian telecom company Telenor ASA entered the
Thai telecom market in 2000, investing 30 billion baht (about
$720 million at the time) in United Telecommunications
Industry PCL (UCOM), one of Thailand's oldest telecom firms.
The Thai-Norwegian company has since made dramatic strides in
revitalizing its market and financial positions. Then, in
November 2004, Telenor's Singapore unit, Telenor Asia Pte Ltd
(Telenor Asia), set up a company named Borelo Ltd (Borelo) in
Thailand with a registered capital of 10 million baht.
Borelo is 48.98 percent owned by Telenor Asia. Telenor
Mobile Holding and Telenor Mobile Communication also jointly
own a combined stake of 0.02 percent in Borelo, with the
remaining 51 percent held by Thai nationals.

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3. (U) Telenor's effort to enter the Thai market culminated
in the October 20, 2005 announcement that it was buying out
the founding Bencharongkul family and taking effective
control of both UCOM and its subsidiary, the mobile phone
operator Total Access Communications (TAC). TAC is the
country's second largest mobile phone provider, which markets
its services under the DTAC brand. Structured in a manner to
work around Thailand's restrictions on foreign ownership of
businesses, the series of transactions comprising the deal
basically enable Telenor to become the majority shareholder
in both UCOM and TAC, when direct and indirect holdings are

4. (U) The cornerstone of the deal is the holding company
Thai Telco Holdings Limited (Thai Telco), a 49 percent-owned
subsidiary of Telenor Asia in which Borelo also has a 24
percent stake. Under the terms of the deal, Thai Telco
purchased a 39.88 percent stake in UCOM (173.3 million
shares) from the Bencharongkul family at 53 baht per share
for a total of 9.18 billion baht (about $229.5 million).
Telenor Asia already holds a 24.85 percent stake in UCOM and
a 29.9 percent direct stake in TAC. UCOM currently owns a
41-percent stake in TAC.

5. (U) Thus, when direct and indirect holdings are combined,
Telenor and its subsidiaries will own 64.73 percent of UCOM
and 70.9 percent of TAC, thereby obtaining effective control
of both companies. Telenor will consolidate the financial
results of UCOM and TAC into its financial results. Thai
Telco Holdings will also submit a tender offer for the 35.27
percent of UCOM and all outstanding shares of TAC not already
controlled by UCOM or Telenor and its subsidiaries. If all
outstanding shares tendered in UCOM and TAC are accepted (at
the projected price of 53 baht per share), the total cost to
Telenor is estimated at 34 billion baht (about $850 million).

6. (U) Precisely because the deal barely complies with the
letter let alone the spirit of Thai restrictions on foreign
ownership, some Thai observers have criticized the deal. Why
should what is essentially a foreign company be allowed to
gain control of a domestic one, particularly in a sector as
critical for both economic development and national security
as telecommunications? (Note: Under current law, foreign
ownership in the telecommunications sector is capped at 25
percent. Parliament has passed an amendment to the law that
would raise the limit to 49 percent. The amendment has
already been approved by the Cabinet and the Council of
State. It is expected to become effective at the end of the
current session of Parliament in December 2005. End note.)

7. (U) Industry observers do not expect the NTC to block the
deal outright, especially if the Securities and Exchange
Commission is on board as it appears to be. As one
securities analyst who has long followed the sector explained
to the Embassy, the industry regulator is in the spotlight as
a result of the deal, and postponing a decision will be
difficult because a foreign entity is involved and because
the NTC is still in the process of establishing itself and
the scope of its authority. On October 24, the NTC announced
that it would examine whether Telenor's takover of UCOM would
hurt market competition and consumers, but it has not given
any indication of either its view or likely decision. One
industry lawyer familiar with the deal told the Embassy that
the NTC is unlikely to interfere with the deal itself,
because TAC can make the argument that the business it
operates under the concession with state-owned CAT Telecom
Pcl (CAT Telecom) is protected under constitutional
provisions to safeguard concessionaires.

8. (U) The same observers nevertheless doubt that Thai
regulatory authorities would permit similar foreign buyouts
of the telcos. Even this transaction is expected to face
difficulties as the purchase goes forward. The
above-mentioned securities analyst immediately downgraded
TAC. &Blocking the deal would not be very Thai,8 he
explained, &TAC will more likely run into other barriers
that will make doing business difficult.8 The industry
lawyer agreed, explaining that when TAC applies for a 3G
license from the NTC, for example, it may encounter
difficulties. Consistent with his prediction, the NTC has
announced that it may delay issuance of any 3G license until
the amendment raising the cap on foreign ownership from 25 to
49 percent becomes effective. The NTC is in the process of
drafting competition codes to prevent market abuse by giant
operators, and has not yet announced the specific provisions
of such codes. Widespread concern among industry players
that the regulatory regime allows local businesses to compete
with foreign companies &on a level playing field8 will
ensure that whatever the NTC does will be closely watched.


9. (U) Although the buyout surprised the industry and those
who follow it, including observers expecting closer
cooperation between TAC and Telenor, the deal appears to have
come together in part because the Bencharongkakul family was
willing to sell out. Boonchai Bencharongkakul, TAC Chairman,
has publicly said, &during the past sixteen years working
with DTAC, I have not been happy for a single day; we have
suffered discrimination by the government.8 Indeed, the
terms of DTAC's concesssion with the state-owned CAT Telecom
to operate are less favorable than the terms of the market
leader Advanced Info Service Public Company Limited (AIS),
which is a member of the Shin Corp group founded by Prime
Minister Thaksin Shinawatra (Shin Corporation Public Company
Limited). In addition to the revenue sharing fees under the
CAT Telecom concession, DTAC must pay an access fee to the
state-owned TOT PCL (formerly Telephone Organization of
Thailand PCL) of 200 baht per month per number. Industry
observers suggest that, after going head-to-head with AIS for
years, Boonchai and Vichai Bencharongkakul are now throwing
in the towel.

10. (U) Several securities analysts have also suggested that
now is an opportune time for the Bencharongkakul family to
exit because of the capital expenditure that will be required
for the rollout of third generation wireless technology (3G),
which will bring higher data transmission speeds and Internet
Protocol (IP) based services. According to a well-placed
source at a local securities firm, TAC needed an infusion of
capital as soon as possible because it has bonds coming due.
Shin Corp CEO Boonklee Plangsiri indirectly confirmed this
point in recent interviews with the press in which he has
emphasized that AIS has sufficient financial resources to
develop a 3G business on its own.

11. (U) Another likely reason for the deal is that the
competitive environment in the mobile services market has
reached the point where some consolidation among the four
major providers (AIS, DTAC, TA Orange, and Hutch) is
inevitable. After several years of rapid increases in number
of subscribers, growth has leveled off and the four major
providers have targeted each others' customers. Revenue per
subscriber has fallen during the past year, in part as a
result of a fierce price war in early 2005. According to
company insiders, TAC initially sought to merge with TA
Orange (TA Orange Company Limited), and turned to Telenor
only after such deal failed to come together. According to
one financial analyst, the family's acceptance of the
surprisingly low selling price of 53 baht per share may be
realistic because they understand the real value of the firm
in a segment of the market about to undergo consolidation.
The same analyst also suggested the possibility that
disagreement among management prompted the Bencharongkakul
family to sell out.

--------------------------------------------- ------
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12. (U) In their public statements, executives insist that
both UCOM and TAC will remain Thai firms. Telenor Asia will
achieve only an &enhanced operational role in mobile
operator DTAC.8 Similarly, all parties emphasize that the
transaction complies with all &relevant stock market
regulations in Thailand and Singapore.8 In effect, however,
the deal makes both UCOM and TAC subsidiaries of Telenor.
Current plans call for UCOM to focus on broadband internet
services and TAC to maintain its focus on mobile telephone
services. Sigve Breeke, currently CEO of TAC, will also
become CEO of UCOM.

13. (U) The deal is expected to increase the competitive
pressures in Thailand's market for mobile phone services.
TAC (commonly referred to by its brand name DTAC) is the
number two mobile phone operator in Thailand. TAC reported a
subscriber base of 8.2 million at the end of August. It has
a 28 percent share of the mobile market, compared with 54
percent for market leader AIS. Telenor executives see
additional upside to the business from continued growth.
Analysts estimate that about 45 percent of the population has
mobile phone access. Expectations regarding future growth
vary widely. Optimists expect the number of Thais with
mobile access to rise to about 75 percent by the end of the
decade. More conservative observers see growth in new
subscribers occurring more slowly, and at the bottom of the
value chain for the most affordable services on offer. All
industry observers expect that Telenor and TAC will likewise
attempting to compete for market share on the basis of higher
quality and innovations in service. The same observers
generally welcomed stronger competition for the market leader
AIS, adding that Thai consumers care little about foreign
ownership in comparison to the value their money buys.


14. (U) Owing in part to existing foreign investment in the
mobile phone operators, and in part to the capital investment
required for buildout of 3G services, there exists
considerable interest both within Thailand and abroad in
other cross-border deals. Singapore Telecom already owns a
21.5 percent stake in AIS. In July 2005, TOT president
Teerawit Charuwat announced that the Singapore Telecom
subsidiary National Computer Systems Pte Ltd (NCS) was
interested in buying a 50 percent stake in a TOT concern
expected to handle e-government projects. Since the
announcement of the Telenor deal, True Corp, which offers
mobile services through its subsidiary TA Orange, has said
that the company would seek a foreign partner with telecom
expertise. The NTC has reported that several European and
Asian telecom operators have sought details on investment
guidelines and regulations. One local newspaper also
reported that the Shinawatra family might sell out its
controlling stake in Shin Corp to China's biggest fixed-line
phone company, China Telecom. Shin Corp has denied the
report, however. Estimates of the speed with which the
rollout of 3G will occur vary, but there is no question that
Thailand is moving forward. The NTC will begin hearings in
advance of issuing 3G licenses on November 7, 2005.

15. (U) Despite such interest in foreign investment in
Thailand,s telecom sector, the domestic legal framework
remains comparatively restrictive. The most fundamental
restriction is the cap on foreign investment that limits
non-Thai investors to a minority stake in telecom concerns.
In the view of Dr. Somkiat Tangkitvanich, Research Director
of the Thailand Development Research Institute, for example,
foreign ownership restrictions will remain a barrier to
cross-border mergers and acquisitions for some time to come.


16. (U) We view Telenor's buyout of UCOM and TAC as being a
positive development for Thai consumers, who have seen
considerable improvement in both the quality and price of
mobile services on offer as a result of heightened
competition in recent years. We do not expect that the NTC
or other regulators will block the takeover, and we think
that over time foreign investment in the sector will
increase. We nevertheless concur with the more cautious
industry observers who expect that the new entity may
encounter barriers to doing business, such as a delay in
obtaining a 3G license, thereby detracting from the
takeover's appeal as a model for future deals. Economic
nationalism pervades both the telecommunications industry and
the Royal Thai Government, and the Telenor buyout was too
much of a shock to the industry for there not to be some sort
of reaction to it. Besides regulatory concerns, in view of
the considerable investment needed for the rollout of 3G
networks, we also think that the deal is more likely to
confirm the trend toward consolidation in the mobile phone
market rather than open it up to new operators.

17. (U) Thus, we do not expect the climate for foreign
investment in the Thai telecom sector to become either more
encouraging or more transparent in the immediate term,
particularly for US companies. When we asked the head of
research at a leading Thai securities firm what the reaction
would be if the company attempting to buyout UCOM were an
American firm, he responded with surprise: &An American
firm? That is different.8 While we are not aware of any US
company seeking to buy into Thailand,s retail telecom market
in the same manner as Telenor, we understand that American
firms are interested in other segments of the market and that
existing caps on foreign ownership constitute a significant
barrier to investment. Without obtaining a special
dispensation regarding ownership restrictions for American
firms in the Thai-US Free Trade Agreement, we see the little
likelihood of American companies being allowed to own a
majority stake in any Thai telecommunications concern.


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