State-controlled Telekom Malaysia Bhd said on Friday it would split off and list its high-growth mobile business, separating it from the slower-growing fixed line and broadband businesses.
Our performance will become more transparent and it will enable the market to value us properly, Chief Executive Abdul Wahid Omar told reporters in the Malaysian capital.
Telekom, worth about 33.4 billion ringgit ($9.8 billion) until trade in its shares was halted for the news, is now about 20 percent undervalued by the Malaysian market, Abdul Wahid said.
Its mobile businesses are worth some 28 billion ringgit ($8.2 billion) while its fixed-line and broadband businesses should be worth 12 billion, making the combined unit worth 40 billion ringgit, the firm said.
Under the plan, Telekom's Malaysian mobile unit, Celcom, will be injected into TM International, which houses Telekom's cellular businesses in nine other Asian countries, among them Cambodia, Indonesia and Singapore.
TM International, nicknamed 'RegionCo' for the exercise, will then be listed in Malaysia by June and used as a vehicle to expand abroad, Abdul Wahid said.
A strategic partner may be roped in to aid the expansion, he said, adding that other telecommunications firms keen on taking a stake have made expressions of interest.
The parties are all foreign, added Yusof Annuar Yaacob, the current chief of TM International.
Still, Malaysia will not relinquish control of either Telekom or TM International, Abdul Wahid said. State investment agency Khazanah Nasional will hold at least a 40 percent stake in both listed units after the separation, Telekom's statement shows.
Investors will have to balance the risk between the fixed line investment, which is the recurring income model, versus that of the mobile side, which is really the growth part, said Jeffrey Tan, an analyst with OSK Securities.
The biggest risk of this whole exercise will be the capital needs and funding. It's very capital intensive.
Abdul Wahid declined to provide financial details of each unit's funding needs. Final details are to be announced by year-end, and the entire exercise will be complete by June, Telekom said.
Telekom's non-mobile business at home will be buffered by its monopoly in fixed line services, where it has a 95 percent market share. In broadband, Telekom has a 96 percent market share.
The government has given the firm a 15.2 billion ringgit broadband project spread over 10 years to ensure that Malaysia catches up with neighbours like South Korea and Singapore, who are able to offer much faster Internet speeds at a fraction of the price Malaysia now offers.
Telekom is expected to foot two-thirds of the cost, while Khazanah will stump up the rest, Abdul Wahid said.
Moody's Investors Service placed Telekom's ratings on review for a possible downgrade following the spin-off.
The review will focus on the final allocation of group debt between the two separated entities, capital management strategies and expected capital expenditure for each, Moody's said.
Depending on the details of such it is possible the rating will be confirmed or it could be downgraded.
Telekom's mobile businesses deliver most of its growth, but the group's share price has been constrained by its large and dwindling domestic fixed-line business.
Shares of Telekom Malaysia, halted for the announcement, will resume trade on Monday. They last traded at 9.70 ringgit a share.
The stock has risen about 6 percent over the last year, compared with a near 40-percent gain in the broader market.
Telekom Malaysia's offshore mobile units are Indonesia's PT Excelcomindo Pratama Tbk, Sri Lanka's Dialog Telekom Ltd, Cambodia's Telekom Malaysia International Cambodia Co. Ltd and TM International Bangladesh Ltd.
Its mobile affiliates are India's Spice Communications Ltd, and Singapore's MobileOne Ltd.
($1=3.415 Malaysian Ringgit)