What did Telstra and San Miguel not agree on?

This morning a press release from Australian telecoms company, Telstra, announced that they have ceased negotiations on a joint venture in the Philipines. The bigger question is why? What made Telstra back out of their plans to invest with San Miguel in the country?

We offer two possible reasons.

1. Disagreement between the investment value of the 700MHz spectrum.

San Miguel owns a sizable chunk of the 700MHz band which will be used in the mobile data network that SMC is building. Telstra CEO has stated that they are willing to invest up to $1PHP 59INR 85EUR 0.95CNY 7 billion for the joint venture with San Miguel. The assumption is that the $1PHP 59INR 85EUR 0.95CNY 7 billion will represent the 40% share of Telstra in the joint venture.

San Miguel, or Ramon Ang for that matter, might have inflated the investment value of the 700MHz band to reduce the potential share of Telstra.

According to Steve Mackay, Director and Founder of Creator Tech, the value of the 700MHz band could be in the range of $900PHP 52,817INR 76,275EUR 857CNY 6,550 million to $2.7PHP 158INR 229EUR 3CNY 20 billion. If San Miguel insists that it should be valued at or near the $2.7PHP 158INR 229EUR 3CNY 20 billion mark, then the $1PHP 59INR 85EUR 0.95CNY 7 billion of Telstra will be reduced to just 27%. That’s just accounting the 700MHz band. San Miguel surely has other assets and infrastructure on top of that which could balloon to $3.5PHP 205INR 297EUR 3CNY 25 to $4PHP 235INR 339EUR 4CNY 29 billion in value, further reducing the investment of Telstra to a mere 20%.

The other scenario is that San Miguel would have asked Telstra to pony up $2.5PHP 147INR 212EUR 2CNY 18 billion for the 40% of the joint venture. Telstra might have thought that it is too much and backed out.

2. Threat that the 700MHz spectrum will be re-allocated to other players.

There has been a lot of pressure on the regulatory side to sub-divide and re-allocate the 700MHz spectrum that is currently owned by San Miguel. Both PLDT and Globe have asked the NTC to act on this.

The possibility that the 700MHz spectrum will be divided among San Miguel, PLDT and Globe might have scared away Telstra. When that happens, it will reduce the advantage of San Miguel in terms of network capacity and also reduce the investment value of the remaining chunk of the spectrum.

Ramong Ang might have assured Telstra that it will hold on to the ownership of that spectrum but the uncertainty is still a big risk for the Australian telecoms company.

Between the two scenarios, the more likely reason would be #1.