Crossroads

At the intersection of technology, finance and the Pacific Rim.

Sunday, June 15, 2008

Vodafone and SK Telecom

Yesterday, we discussed the case of why someone like a Vodafone (VOD) would have interest in acquiring SK Telecom, given the relatively low market cap of SKT. The specific scenario that I outlined would be:

1. SKT sell at around 5x EBIT whereas VOD sells at 16x.

2. If VOD were to buy SKT they would need to pay a premium--maybe 30-40%--which would push the SKT purchase price multiple to perhaps 7-8x EBIT.

3. VOD shareholders would benefit as their stock could appreciate since the part of the operations of VOD that runs the SKT part would be valued more highly than the purchase price that VOD paid.

Please understand I am not advocating SKT be bought or sold--just playing "What if". I wondered what NTT Docomo was selling for and it isin the range of 7.5x EBIT--market cap of $61Mn and they generate about $8BN in EBIT over the last 12 months.

A class participant wrote the following to me yesterday:

1. I think the reasons why the mutiple of SK telecome is only 5 comapred to the example company's 16, would be many such as SK telecom company's location in terms of geopolitical position in globe, its main market's credibility, market size, local cultures, the investor's perception of the korean market where SK telecome does business and so on. So, even the example company buys out SK telecome 100%, it seems it is quite difficult to expect the multiple 5 would become 16 because the reasons listed for SK T's mutiple 5 will exist and affect in the Korea market. If SK telecome company does business in the same country market as the example company's, it would become 16. But, as far as those listed reasons are still effective in the market, i think it is quite difficult to become simply around 16 in the future, maybe 8 or9 or so.

2. Also technically, it looks so difficult to buy out SK telecome 100% because SK shares are owned by thousands of shareholders. Unless the example company suggests the really good price with much premium, the shareholders will not sell their shares. If the example company gives a really good price to buy out all the shares, the return in this buyout would not be big enough the example company are really interested in this buyout deal. If the example company raise the stock price so that SK T multiple "5" becomes "16", it would be difficult to expect any return to the example company.

Addtional extended inquiry:
is there any difference between " the example company's buying more than 50% of all SK T shares" and buying out 100% shares in terms of the change of SK T's multiple 5 ? Normally, more than 50% shares are enough to get a control over one company?

Let me try to answer them one by one.

1. Yes, country does affect the multiple. But in this case, the I believe the multiple is out of whack--yes, it is Korea. But Korea is an advanced country, with a relatively stabile economy and reasonably good protection of public investors. Of course SKT's industry is not growing and that deserves a big discount. But NTT Docomo's market is just as mature and trades at a much higher multiple as do other European telcos. VOD has a 16x multiple and it is not considered to be high--pretty low actually as this translates to a 12x PE ratio which is below average globally. Believe (the last time I looked) the Dow is trading at a 16x PE. The participant is right--probably the market would not just translate the 16x value of VOD to the SKT portion in the event that it was purchased. It would probably be something less (perhaps 12x?)--but it certainly would not be 5x. But this is what makes the investment world an interesting one. It is just my opinion against many opinions that form the market out there.

2. Usually one can buy 100% shares of a public stock by making a tender offer--this is a direct offer to the shareholders to purchase their shares. While not all shareholders will necessarily tender, there are typically what we call "drag along" rights, meaning that if the purchaser takes a substantial majority of the shares (80% range but depends on local law), then the other shareholders are forced to tender their shares for purchase. The price offered for the shares is typically at a premium to the price in the market so shareholders usually do tender their shares. I would imagine that the tender offer price would not be based at a 16x multiple, but at a good premium to the existing mutiple. You do see recalcitrant management objecting to the tender or purchase offer---see the current case of Yahoo vs. Microsoft. Note that in the Microsoft case they did not go directly to the shareholders for the shares but first sought management and BOD buy-in through the offer. Please also note that in Korea it is not possible to tender for all of the shares since I believe foreign ownership in telcos is restricted to either 49% or 51% (forget which one).

Lastly, a company, if it can, should try to purchase 100% of the shares, though there are many instances where a majority is enough (e.g. JV partner's resources, local market acceptance, employees, capital etc.). You do not have full control until you have 100% of the shares, since with a minority investment you always have to consider the interests of the minority shareholder (or face a lawsuit and related damaging publicity). I will explain this later in class through a case study.

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