Singtel’s associate Intouch to merge with Gulf Energy. What's the impact?

Summary

• Proposed restructuring of AIS’ largest shareholder. Intouch, AIS’ largest shareholder, has proposed a merger with Gulf Energy (Gulf) via a share swap. A new listed entity (NewCo) will be formed to take over the assets of Intouch and Gulf Energy and simplify AIS’ shareholding structure. According to the management of Gulf Energy, the transaction will position the NewCo as a growth company with a stronger balance sheet to fund a new growth cycle in green energy, supporting potential demand growth of industrial companies and data centres. The transaction is expected to be completed by the second quarter of 2025.
• Singtel’s effective stake in AIS will decline. As part of the transaction, Singtel will swap its current 25% stake in Intouch for a 9.08% stake in NewCo. Following the transaction, its effective stake in AIS will reduce to 26.7% from 33.4%. The NewCo will hold a 40.4% stake in AIS, and Gulf Energy is expected to account for 68% of NewCo’s FY23 pro-forma net profit. Gulf’s largest shareholder, the Ratanavadi family, will hold a direct 59.7% stake in NewCo, and an indirect 24.2% stake in AIS. Intouch’s board proposed to pay a special dividend of Bt4.5/share before the completion of the transaction.
• Singtel will unlock value of assets. Singtel will book an accounting gain of S$0.4bn, as the swap price of Intouch shares are above its book value. It will also receive S$0.14bn (S 0.82 cents/Singtel share) when the special dividend is paid. But it will no longer recognise profit (FY24: S$121m) and receive dividend (FY24: S$95m) from Intouch. Singtel will evaluate options for its 9.08% stake in NewCo.
• AIS performing well and contributing to Singtel’s earnings. AIS reported strong 2Q24 net profit growth of 19% year-on-year, and maintained its 2024 EBITDA guidance of 14-16% year-on-year growth. AIS continues to benefit from industry consolidation with the merger of the 2nd and 3rd largest players.

Proposed merger between Intouch and Gulf Energy 

Intouch Holdings is a major Thai company that primarily invests in telecommunications and media businesses. 

The company is best known for their majority ownership in Advanced Info Service (AIS), Thailand’s largest mobile phone operator.

Gulf Energy is a leading energy company in Thailand. They focus on producing and distributing electricity and natural gas.

In recent years, Gulf Energy has diversified into the infrastructure and digital businesses. GULF spent over Bt90bn to acquire a 47% stake in Intouch, a 40% shareholder of Advanced Info Services (AIS), a leading provider of mobile and high-speed internet broadband, and digital businesses for enterprise customers. 

As the biggest shareholder of Intouch, Gulf Energy has effective control of AIS. 

On 16 July 2024, Gulf Energy and Intouch announced their decision to merge by means of a share swap.

This will create a NewCo in which the major shareholder of Gulf Energy, the Ratanavadi family will own a 59.72% stake. 

Under the NewCo, the Energy and Infrastructure business is estimated to account for 68% of FY2023 pro-forma net profit. 

The management of Gulf Energy has clearly stated their intention to position the NewCo as a growth company. 

After the merger, the NewCo’s balance sheet is expected to be stronger, allowing the company to fund a new growth cycle in green energy, supporting potential demand growth of industrial companies and data centres.

How will the transaction impact Singtel and Intouch?

#1 – Singtel will receive a special dividend and book accounting gain

Singtel will swap its 25% stake in Intouch for 9.08% stake in NEWCO. It will book an accounting gain of S$0.39bn (S 2.36 cents/Singtel share), as the swap price of Intouch is above the value carried in its book.

Intouch board has proposed to pay a special dividend of Bt4.5/share before the share amalgamation if certain conditions are met. Singtel will receive S$0.14bn (S 0.82 cents/Singtel share). 

However, post-merger, Singtel will no longer recognise profits (FY24: S$121m) and receive dividend (FY24: S$95m) from Intouch.

Singtel’s effective stake in AIS will be reduced to 26.7%, from 33.4%. It will evaluate its option for the stake in NEWCO.

Singtel will participate in the voluntary tender offer for AIS, at Bt216.3/share. If it successfully acquire the maximum 297m shares, its stake in AIS will rise by about 10%, to 36.7%. 

The total outlay is S$2.38bn (S 14.4 cents/Singtel share). The additional stake will contribute profit of S$37m, after financing cost of S$70m.

We note that AIS is trading at Bt240/share, 11% above the VTO price. It is thus not compelling for AIS’ minority shareholders to accept the offer.

#2 – AIS continues to benefit from industry consolidation 

Gulf Energy is studying the opportunities for a digital infrastructure platform that will support future businesses of its energy infrastructure in the digital era. 

Apart from long-term growth potential from the synergy between power and telco businesses, AIS continues to benefit from industry consolidation as the 2nd and 3rd largest players have merged.

Competition in the mobile business has been lower after TRUE and DTAC agreed to merge in 2022. Thailand's telecom sector has become a duopoly, with each operator having a similar market share and network capacity. 

The consolidation of players in the industry is expected to result in improving revenue and profit of mobile operators as measured by Average Revenue Per User (ARPU). Since 2023, price competition has been less intense as both players removed aggressive loss-making price plans.

TRUE, AIS’s only remaining competitor, is now focusing on the integration and cost-cutting of the combined entity. This also results in cost savings from lower advertising expenses, lower promotions, etc. 

For future growth in the data centre business, telecom infrastructure could gain in the long run if data centre rollouts support increased data usage.

#3 – NewCo’s additional debt capacity offers headroom for growth 

With Intouch’s zero debt, the NewCo’s net interest-bearing debt-to-equity ratio will be 0.9x, down from GULF’s 1.7x current net gearing based on FY2023 figures. 

Its strong balance sheet would allow them to have more flexibility to fund future growth.

Gulf Energy estimates that, with the expanded balance sheet, the NewCo can borrow an additional Bt150-200bn of new debt before the net gearing ratio reaches its limit of 2.0x. 

Apart from additional debt capacity from the merger, AIS’s steady cash flow will also be used to fund NewCo’s growth initiatives. AIS will pay dividend payments to NewCo, which will directly own 40.44% of AIS. 

The majority of the NewCo’s future CAPEX will be directed towards the energy business, particularly green energy, while the rest will be spent on the expansion of digital businesses and infrastructure. 

The merger would shift control in AIS, with the major shareholder of GULF holding a higher effective ownership stake, and Singtel having a reduced effective ownership in AIS. 

Gulf Energy’s total holdings (direct and indirect) in AIS will increase from 19% to 33%, while Singtel’s total holdings will be diluted from 33% to 26.7%.

Transaction expected to be completed in 2025

The transaction is expected to be completed by the second quarter of 2025, when certain conditions are met. This will include a requirement for 75% of shareholders at Gulf Energy and Intouch to approve the transaction. After the transaction, Singtel will evaluate options for its stake in NewCo. 

In the meantime, AIS is expected to benefit from industry consolidation as competition in the mobile business has been lower after TRUE and DTAC agreed to merge in 2022.

The stronger balance sheet of NewCo would give more flexibility and allow the company to grow at a faster pace. 

Join our upcoming 'SGX Academy Webinar: Singtel backs merger of Intouch and Gulf: Paving new avenues of growth?'  on 27 August to learn more about the transaction and its potential impact to Singtel, Gulf Energy and AIS.

Download the full report here.

Related links:

• Singtel's share price history and share price target

• Singtel's dividend history and dividend forecast

• What You Need To Know About Gulf Energy, Thailand's Energy Powerhouse

• What you need to know about AIS: Singtel-backed telco in Thailand with 4.4% dividend yield

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