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06BANGKOK538 THAILAND’S DEAL OF THE CENTURY: TEMASEK BUYS OUT PM’S SHIN CORP

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“50877”,”1/27/2006 10:40″,”06BANGKOK538″,

“Embassy Bangkok”,”UNCLASSIFIED”,

“04BANGKOK6901|04BANGKOK7124|05BANGKOK115″,”VZCZCXRO4072

PP RUEHCHI RUEHDT RUEHHM

DE RUEHBK #0538/01 0271040

ZNR UUUUU ZZH

P 271040Z JAN 06

FM AMEMBASSY BANGKOK

TO RUEHC/SECSTATE WASHDC PRIORITY 5976

INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS PRIORITY

RUEHCHI/AMCONSUL CHIANG MAI PRIORITY 1134

RUEAWJA/DEPT OF JUSTICE WASHDC PRIORITY

RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY”,”UNCLAS SECTION 01 OF 05 BANGKOK 000538

 

SIPDIS

 

SIPDIS

 

STATE FOR EB/CIP, EAP/MLS

USTR FOR BARBARA WEISEL, JONATHAN MCHALE

COMMERCE FOR JEAN KELLY, JULIET BENDER, JEREMY MARCUS

JUSTICE FOR STUART CHEMTOB

TREASURY FOR OSIA

STATE PLEASE PASS TO USTR

 

E.O. 12958: N/A

TAGS: ETRD, ECPS, EINV, ECON, SN, TH

SUBJECT: THAILAND\’S DEAL OF THE CENTURY: TEMASEK BUYS OUT

PM\’S SHIN CORP

 

REF: A. 04 BANGKOK 6901

B. 04 BANGKOK 7124

C. 05 BANGKOK 115

 

BANGKOK 00000538 001.2 OF 005

 

1. (U) SUMMARY: On January 23, 2006, Singapore,s Temasek

Holdings announced the largest corporate takeover in

Thailand,s history: the 73.3 billion baht (USD 3 billion)

purchase of the 49.6 percent stake in Thailand,s Shin Corp

Plc (Shin) held by members of Prime Minister Thaksin

Shinawatra,s family. Structured through newly-created

holding companies to get around Thailand,s restrictions on

foreign ownership of telecommunications companies in a manner

similar to Telenor,s buyout of Total Access Communications

(TAC) and United Communications (UCOM) in October 2005, the

Temasek takeover of Shin gives the investment arm of the

Government of Singapore effective control of Thailand,s

leading mobile phone operator, Advanced Info Service Plc

(AIS), and a substantial stake in both Shin Satellite Plc and

Thai AirAsia, among other subsidiary companies. Shin Corp

comprises about 2.5 percent of the total capitalization of

the Stock Exchange of Thailand.

 

2. (U) The financial market has taken the deal in stride and

the Thai public appears not to care deeply despite opposition

politicans, criticism, particularly of the tax exemption on

the proceeds of the sale. The deal makes good business and

political sense for the Prime Minister and his family, and

indications are that it will likely hold in the absence of

significant legal challenge even if some participants may be

charged with wrongdoing. The Shin buyout also makes business

sense for Temasek and its subsidiary Singapore Telecom, while

at the same time reinforcing the Government of Singapore,s

strategy of strengthening ties with Thailand. The Prime

Minister,s exit from the telecom business removes a

significant barrier to sectoral liberalization. The fact

that the deal was structured to get around Thailand,s

restrictions on foreign investment nevertheless raises

serious questions about the investment climate in Thailand,

and shows the limits of liberalization to date. The outcome

to hope for going forward is that any domestic political

debate about policy issues such as foreign ownership of

telecom assets may put to rest some of the Thais fears of

market liberalization, and by extension a Free Trade

Agreement with the United States. End Summary.

 

THE DEAL OF THE CENTURY

 

3. (U) After weeks of speculation, Temasek, the investment

arm of the Government of Singapore, announced that it was

acquiring the Prime Minister,s family members, 49.6 percent

stake in Shin (1.488 billion shares) in a cash purchase of

73.3 billion baht effective on the same day that an amendment

to the Telecommunications Business Act (TBA) raising the cap

on foreign ownership of Thai telecom companies from 25

percent to 49 percent went into effect. The Governor of the

Bank of Thailand told the press earlier that the inflow of

currency (almost 50 billion baht) to conclude the deal caused

the Thai baht to appreciate. The Revenue Department

determined that because the Prime Minister,s son, daughter,

sister, brother-in-law, and sister-in-law sold their shares

as individuals (i.e., because it was not a company selling

the shares), the proceeds of the sale would be exempt from

income tax. The tender offer for the remaining shares of

Shin, as required by Thai law, was set at 49.25 baht/share,

the price paid for the Shinawatra family shares.

 

4. (U) Industry observers agree that the real object of the

deal is the mobile operator AIS, in which Singapore Telecom

(SingTel), already has a stake of about 20 percent. (Temasek

owns a 60 percent stake in SingTel.) Had SingTel simply

attempted to acquire AIS, however, it would have run afoul of

even the revised TBA, which provides for an upper limit of 49

percent foreign ownership of a Thai telecom firm, and it

would have triggered a tax event on the sale at a rate of 30

percent.

 

5. (U) In a carefully crafted transaction, worked out in

consultation with tax-law expert Suvarn Valaisathien, Wichit

Surapongchai, president of Siam Commercial Bank, and Shin

Corp CEO Boonklee Plangsiri, Temasek acquired the Shinawatra

family,s stake in Shin through several holding companies

 

BANGKOK 00000538 002.2 OF 005

 

newly established to effect the deal. As reported in the

press and explained to the public, Temasek,s 49 percent

stake in the joint venture Kularb Kaew (meaning Rose)

represents its point of entry in the deal, but the remaining

51 percent stake of that entity is nominally Thai investors

participating in the deal. The major Thai investor in Kularb

Kaew was lent his 20 billon baht capitalization contribution

by Siam Commercial Bank with the Kularb Kaew shares as

collateral. Kularb Kaew, in conjunction with Siam Commercial

Bank, and a holding company named Cypress Holdings control

another holding company, Cedar, which, together with still

another holding company, Aspen, now owns the Shin shares

purchased from the Shinawatra family members. A telecom

analyst who has reviewed the relevant corporate filings at

the Ministry of Commerce, however, explained that even this

complex structure oversimplifies the architecture of the

deal. Telenor,s buyout of Total Access Communications and

United Communications (REF A) is clearly the model for the

transaction, but even that complex deal now appears simple by

comparison.

 

6. (U) As a result of acquiring control of the holding

company created by Thaksin and his wife Khunying Pojaman

about 30 years ago to manage their many enterprises, Temasek

now has effective control of AIS, broadcaster iTV Plc (52.94

percent), Shenington Investments Pte (100 percent), consumer

finance firm Capital OK Co., Ltd. (60 percent), CS LoxInfo

Plc, and several other firms. Temasek has also acquired a

significant stake in Shin Satellite (41.34 percent), Lao

Telecom (49 percent), and budget carrier Thai AirAsia (50

percent, jointly owned with Malaysia,s AirAsia Berhad).

 

7. (U) Financial authorities have interpreted Thai law with

considerable latitude in determining the tender offer

required as part of the deal. Since ShinSat is less than 10

percent of Shin Corp\’s holdings, for example, a Securities

Exchange Commission (SEC) panel ruled that a tender offer

would not be necessary. They similarly exempted iTV from the

requirement to make a tender offer. The tender offer for

outstanding AIS shares proposed by Shin Corp\’s financial

advisor, based on conservative but justifiable assumptions,

is 72.31 baht, or about 30 percent below the 100-104 baht

range at which the company traded the previous week. Under

Thai law, the financial advisor of other shareholders may

comment but not change the terms of the offer. At such

price, few takers are expected, thus reducing the cost to

Temasek. Securities industry contacts have told the Embassy

that they do not expect shareholder lawsuits.

 

MOTIVES

 

8. (U) Temasek appears to be acting out of both business and

political concerns. On a strictly business level, the

acquisition of AIS makes sense because of the existing

relationship between AIS and SingTel, the relative saturation

of the Singapore telecom market, and the platform for

expansion that the Thai market affords. A former diplomat

who now works in the securities industry told the Embassy

that geopolitical concerns also loom large in Temasek\’s

thinking. The deal certainly had the blessing of the

Government of Singapore, and &Temasek likes to buy high in

Thailand. The government wants Singapore to be closer to

Thailand to guard against Malaysia to the North and chaos in

Indonesia to the South.8 Since prior to this transaction

Shin Corp typically traded at a 20 percent discount to NAV,

Temasek likely paid a 20 percent premium by buying at NAV.

 

9. (U) The Prime Minister has focused on his desire to put

to rest charges of conflict of interest. &The stock

transaction was not decided by Shin Corp,8 he said, &but by

my children who want their father to devote his attention to

serving the country.8 (Note: when he became Prime

Minister, Thaksin transferred his Shin shares to the five

family members who sold their Shin shares in the Temasek

deal. End note.) Few observers believe that Thaksin has put

business completely aside, and the question remains, why now?

 

10. (U) There is a solid case to be made that the Temasek

deal just makes good business sense for the Prime Minister\’s

family, particularly in view of the limited number of

 

BANGKOK 00000538 003.2 OF 005

 

potential buyers. AIS has succeeded beyond even Thaksin\’s

wildest ambitions, and he has said privately that he is tired

of the telecom business. According to one carefully

researched estimate prepared by an analyst covering AIS, at

the current share price the Prime Minister has made 100 times

his initial investment. While most observers expect AIS to

remain highly profitable, there is little doubt that the

liberalization of the telecom services in progress, the

extensive investment required to rollout third-generation

(3G) services, and heightened competition are reshaping the

telecom market. Selling makes sense, particularly if other

opportunities present themselves, and few doubt Thaksin\’s

ability to spot an opportunity.

 

11. (U) The most conspiratorial theory of the sale in

circulation in Bangkok says that by cashing out now the Prime

Minister Thaksin is purchasing a political insurance policy.

Converting the family,s telecom holdings into cash enables

Thaksin to safeguard his fortune should his political career

end in disgrace sooner rather than later. Dreams of a

&Bangkok-based movement to overthow8 the Prime Minister\’s

&tyranny8 imposed on the country by rural voters may rest

on the wishful thinking of a small minority, but there is no

question that liquid assets are easier to move, and harder

for the authorities to seize, particularly if located

overseas.

 

REACTIONS

 

12. (U) The Embassy,s telecom and finance contacts are

impressed by the execution of the Shin buyout. Everyone

recognizes the talent that both sides drew upon in

structuring and executing the deal. The SET closed up

slightly on Tuesday, and down slightly on Wednesday, which

suggests that the market is taking it in stride as a done

deal.

 

13. (U) With the possible exception of tax issues, the Thai

public is essentially indifferent to the Temasek deal. The

headline &Prime Minister rids himself of political thorn and

makes money too8 sums up the initial reaction. Although

criticized daily in the Bangkok newspapers, Prime Minister

Thaksin is much admired and highly popular nationally, in

part because of his business acumen and resulting financial

success. On the day the deal was officially announced he was

leading a reality TV show in Roi-Et province highlighting his

concern for the welfare of the poor. Although derided by

political sophisticates in Thailand in the same way as in the

United States, reality TV is highly popular in Thailand and

the Prime Minister is better able than most politicians,

especially the opposition, to turn it to political advantage.

Thaksin has predictably derided criticism as envy: &I\’m a

big guy. How can I not be straighforward? I am not a

nobody.8

 

14. (U) Some opposition lawmakers have predictably

criticized various aspects of the Temasek deal, but such

criticism of the sale itself does not appear to be gaining

traction with a wider audience. Bangkok Senator Sophon

Supapong, among others, has criticized the amendment to the

TBA that raised the foreign investment cap from 25 to 49

percent as enabling the sale of precious national assets. Of

particular concern in this regard are satellite broadcasting

and television frequencies granted to Thai concessionaires.

Opposition MP Korn Chatikavanij, a former investment banker,

has questioned whether the Prime Minister,s family evaded

paying income tax by structuring the deal as they did.

Bangkok Senator Chirmsak Pinthong has likewise accused the

Finance Ministry of adopting double standards to protect the

Shinawatra family. The PM has pointed to the fact that there

is no capital gains tax on transactions made by individuals

on the Stock Exchange of Thailand.

 

15. (U) Significantly, the Opposition Democrat Party Leader

Abhisit Vejjajiva has not made protest against the Temasek

deal the focus of his public position. Abhisit has

criticized Thaksin\’s mention of setting up a charity fund to

alleviate poverty, saying that the Prime Minister would be

better just to ensure that his family pays its share of

taxes. The opposition can be expected to press on the theme

of tax fairness, particularly since it is income tax season

 

BANGKOK 00000538 004.2 OF 005

 

in Thailand. Fortuitously for the Prime Minister, however,

the opposition is currently mired in a widening corruption

scandal concerning bidding for Bangkok Metropolitan

Administration (BMA) road construction projects. Abhisit is

not involved, but his party is in charge of Bangkok, thereby

undercutting their ability to take the moral high ground on

issues of transparency and governance.

 

POSSIBLE CHALLENGES

 

16. (U) If the Temasek deal is to run into trouble, the most

likely setting will be court, particularly the Supreme

Administrative Court. Almost alone among independent

institutions, the administrative court has served as a check

on executive power, such as when it suspended the initial

public offering of state-owned power producer EGAT Plc (REF

B). In view of the various favorable determinations by

regulators that facilitated the buyout, it is possible that a

court challenge may emerge. The Law Society of Thailand and

the Press Council of Thailand announced on January 26 that

they are conducting a probe of the Shin buyout and said that

income tax must be paid on the deal. The probe will focus on

the legal aspects of the tax-free sale and the effects on

national security of selling national assets to foreigners.

Other telecom companies have given no indication that they

plan to challenge the deal in court.

 

17. (U) The challenges more likely to stick are those

concerning individual conduct rather than the overall

structure of the deal. The Stock Exchange of Thailand is

investigating five brokerage houses for possible insider

trading in connection with the deal. Journalists and

lawmakers have focused on the ironically titled Ample Rich

deal. The specific allegation is that Ample Rich Investment

Co. Ltd., a company owned by Thaksin and registered in the

British Virgin Islands, sold 329 million shares of Shin stock

to Thaksin,s children at 1 baht per share on January 20,

which they then sold to Cedar Holdings and Aspen Holdings on

January 23 at 49.25 baht per share. Whether these or other

allegations are true, or will lead to further allegations

against the Prime Minister himself, is unknown and will

likely take considerable time to ascertain.

 

EFFECT ON THE TELECOM MARKET AND COMMENT

 

18. (U) In the immediate-term, the Temasek deal will not

likely bring great change to the Thai telecom market.

Yingluck Shinawatra, the Prime Minister,s younger sister has

resigned as President of AIS, but Temasek has pledged &no

change at Shin8 including, for example, the merging of

SingTel and AIS. Indications are AIS will continue to go

forward with its rollout of 3G services.

 

19. (U) Longer-term, the Prime Minister,s exit from the

telecom market removes a significant barrier to

liberalization of the sector. A majority of the Thai mobile

services industry is now controlled by foreign firms. True

Corp, whose subsidiary TA Orange is the last major

wholly-Thai owned operator in the mobile services market has

seized on the deal as an opportunity to urge scrapping the

existing telecom concessions, described in detail in REF C,

so as to create a level playing field in the mobile market.

While it is not clear that the National Telecommunications

Commission (NTC) has the appetite to take on concession

conversion, a matter on which the state-owned enterprises TOT

Plc and CAT Telecom Plc may be expected to fight, there is

little doubt that having AIS out of the Prime Minister,s

hands lightens the political pressure*both real and

perceived*on the regulator. Since the NTC is inquiring into

the effect of the Telenor deal on competition in the market,

it may take up the same question with respect to the buyout

of AIS.

 

20. (U) Comment: While the recent entry of foreign firms

into the Thai telecom market may be welcome to foreign

investors, the form by which it has occurred raises

disturbing questions about the investment climate in

Thailand. Both Temasek,s buyout of Shin and Telenor,s

acquisition of TAC and UCOM were obviously structured to get

around the intent, if not the letter of existing laws

limiting foreign ownership of telecom companies. The fact

 

BANGKOK 00000538 005.2 OF 005

 

that large foreign firms were able to blatantly get around

the law at the invitation of leading Thai players suggests

that the law is quite malleable when insiders want it to be,

which raises the question of just how much protection the law

really affords. Similarly, the requirement for foreign

entities to establish such Byzantine legal structures to

enter the Thai market underlines just how halting Thailand,s

commitment to liberalization really is. Many foreign

companies simply don,t want to deal with the uncertainty of

Thai law which can be endlessly flexible or absolutely

unbending depending on the precise circumstances and

individuals involved.

 

21. (U) The Embassy agrees that the deal makes good business

sense for the Prime Minister and his family, and that it will

likely survive political criticism. The exceedingly

favorable timing and terms of the sale (such as the income

tax exemption) nevertheless render it vulnerable to

challenge, so it is unlikely to fade from the headlines any

time soon. Although the policy-relevant debates such as that

over the sale of so-called national assets (e.g.,

frequencies) to foreigners does not appear likely to have

broad political appeal, they are of concern to many of the

same political figures who are following closely developments

relating to the Thai-US FTA. We think that it is good for

this debate to be occurring independent of the FTA and

without reference to the United States or American companies.

With the Prime Minister out of the telecom business and the

Thai mobile phone market no worse off than before it was

dominated by foreign firms, the prospects have improved for

allaying Thai fears of market liberalization.

BOYCE

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Written by thaicables

July 10, 2011 at 3:55 am

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