SPLITTING PTCL

The restructuring may delay the transaction for couple of years at least

By SHABBIR H. KAZMI
Mar 29 - Apr 04, 2004

It seems that the GoP wants to go ahead with splitting Pakistan Telecommunication Company Limited (PTCL) before its ultimate sell off. This impression is further consolidated by the views of Privatization Commission and change of top management of the company. The impression has been further supported by the indication given by Minister for Investment and Privatization regarding the possibility of privatization of cellular operation (U-fone) to pave way for time frame for the remaining restructuring and subsequent privatization of the restructured entities. However, the overwhelming view is that splitting the PTCL may delay its privatization for couple of weeks, at least.

It is understood that the idea of splitting the PTCL has been floated by the Technology Group at a presentation and seems to have been accepted by the Privatization Commission. The restructuring of PTCL is said to be aimed at splitting the telecommunication giant into Competitive Local Loop (CLL), long distance international and telephony services (LDI) and Cellular operations. However, company sources maintain that these are all possible options, which are being explored by the advisors and it is premature to say, which option would be exercised.

It is believed that the propagators of splitting theory is based at achieving sell off of the telecommunication giant in piecemeal as there seems to be dearth of quality bidders. Some analysts say, "By exercising this option the GoP may succeed in selling some of the restructured entities at premium but some would become a permanent liability. The case of NTC creation and delay in its sell off must not be ignored.

It is believed that the GoP's desperation for privatization of PTCL is evident from the overall perception that it has already become a missed opportunity and further delay cannot assure its sale as a compact utility. However, the GoP can only be blamed for the prevailing situation. It has not been able to privatize PTCL mainly due to lack of will. The decades of nineties was the ideal period as foreign investors had keen interest in acquiring strategic stake in telecommunication companies operating in the emerging market. Now they seem to have hardly any interest in investing in emerging markets like Pakistan and least interest in telecommunication companies of the developing countries.

According to an analyst the GoP should have split the PTCL prior to introducing deregulation policy. Once the GoP has decided to go and opt for gradual and complete deregulation splitting can only add to problems. The concept of splitting prior to deregulation had paid off very well in Brazil. Had the GoP followed the same strategy the situation would have been different by this time.

Whatever strategy the GoP may chose to follow the PTCL, as compact entity continues to enjoy enormous earning potential mainly due to increase in installed line capacity. According to a report by Capital One Equities, the access lines installed is expected to enhance up to 5.2 million by the end of current financial year. The bottom line would also be improved due to installation of wireless local loop system from own sources and intelligent network platform for pre-paid calling cards services. Despite reduction in the line rent and international outgoing calls there is expectation for volumetric growth in call traffic.

Based on the above enthralling factors, full year earnings forecast is around Rs 24 million or an EPS of Rs 4.72. Therefore, the company is also expected to improve its dividend payout to Rs 3.60 per share. At the Karachi Stock Exchange the scrip is being traded around Rs 39.75/share and offers attractive dividend yield of 8.8%.

Unlike many other statep-owned entities, PTCL is cash rich. Therefore, the management must continue adding new lines to achieve greater penetration. Though, the company may boost paying attractive dividend, there is ample room for attaining higher efficiency and cost reductions. Looking at the total population and total installed lined, the penetration is still very low.

It may also not be out of context to suggest that since the government is following the policy of divestment of shares of state-owned companies offer of another 5% shares to general public is expected to received good response. The market has the appetite and there cannot be any harm in offering more shares to general public as the Privatization Commission boasts, "Privatization for people".