Financial Management Sing Tel Acquire Optus, Is It Fair & Reasonable?

2559 words - 10 pages

(Q1)The offer price given by SingTel for the acquisition of Optus is not a "fair and reasonable" one. According to 3 different financial valuation models (discounted cash flow analysis, EBITDA & P/E Ratio - see attached Appendix), Singtel is also giving high premium to buy Optus in all above market approach analysis.The SingTel bid will bring more confidence to the telecommunications market, they are paying an A$4 billion premium, Optus values around A$13 billion only.My analysis is based on a close observation of the varying fortunes of Opus over the last decade. It wasn't until 1998 that the company finally turned around, under the leadership of Chris Anderson, and began to offer competition in the market. A year later it had taken over the position of "competition leader" from AAPT.At the same time its broadband network started to perform and renewed confidence was clearly reflected in the company's activities from late 1999 to mid-2000. But then the "For Sale" sign went up and unfortunately several investment programs, notably the broadband upgrade, were halted. However, at the height of its success the company valued itself on the basis of continued success in the future, and in particular its revenue potential in broadband. At that time I agreed that, if the company were able to maintain its drive, its value could indeed reach the $16 - $17 billion mark by 2003/ 2004.Yet any take-over would inevitably cause disruption, as well as a probable change in leadership, direction, strategies and visions. As a general rule this will produce at least one year of ineffectiveness. This would severely hamper growth and as a result the blue-sky valuation of $17 billion would be unrealistic.Furthermore, it had also become evident worldwide, that mobile communications were not going to be a big money-spinner, and that 3G was at least three years away and would necessitate enormous investment - and there was no clear business model in existence to deliver a reasonable return on that investment. None of these important elements were taken into account in the earlier valuation forecast.The key assumptions underlying my valuation are basis on historical data plus forecast on upcoming years according to economic environment, industry trend...etc. The multiples of valuation models will change from time to time due to other investment opportunities, market risk, sector risk and inflation. The multiples decreased in past three years due to intensive competition in telecommunication sector.Price and Terms of Offer:SingTel will offer all Optus shareholders three alternatives for each Optus share:(i) Share Alternative: 1.66 SingTel shares; or(ii) Share and Cash Alternative: 0.8 SingTel shares plus A$2.25 in cash; or(iii) Share, Cash and Bond Alternative: 0.54 SingTel shares plus A$2.00 in cash plus A$0.45 in SingTel US$ denominated bonds. Shareholders who accept the Share, Cash and Bond Alternative may receive additional cash and bonds (as may become available as...

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