SLT plans share offering to fund mobile drive & acquire fixed line rival

20 Feb 2004

The government of Sri Lanka is preparing the ground to sell its shares in the country’s dominant telco Sri Lanka Telecom (SLT) so that the operator can ramp up its presence in the mobile market and buy one of its two competitors in the fixed line arena. The state currently holds 49.5% of SLT, having sold 35% of the company to Japan’s NTT Com in 1997 for USD225 million and divested a further 12% stake at the operator’s IPO in 2002. Last month SLT’s board said that it had commissioned a report from Colombo’s DFCC Bank, which recommended that the government should sell a 25% stake via an international listing, and the remaining shares to a foreign fund, rather than to an overseas telecom operator. There has been speculation that the government may offer a stake to India’s Tata Group, but NTT has already said that it would oppose any move to bring in another telecom operator as an equity partner.

The proceeds from the sale, which is expected to take place within the next few months, will go towards bolstering SLT’s presence on two fronts, by far the most important of which is the country’s mobile market. To date SLT has had only a limited influence in Sri Lanka’s burgeoning cellular sector, where its subsidiary Mobitel commanded less than 10% of subscribers at the end of 2003. Mobitel has been wholly owned by SLT since November 2002 . In that month the PTO paid LKR922 million to acquire the 60% of the operator that it did not already own from Australian incumbent Telstra. Mobitel launched its TDMA network in 1993, in the process bringing the first taste of competition to Celltel, owned by Millicom International Cellular (MIC), which launched ETACS services four years previously. Since the launch of GSM services by the Telekom Malaysia-owned MTN Networks in 1995, however, Mobitel has faced an uphill battle to attract subscribers, and now trails market leader MTN, which presides over almost 60% of connections, by an almost unassailable margin.

However, SLT is seeking to redress the balance in the next few years following the launch of a new GSM-1800 service by Mobitel in late 2003. The network, which is being built in three stages by Swedish equipment manufacturer Ericsson, will eventually offer GPRS and EDGE-based services, beginning with selected areas of Colombo. In November 2003 the first phase of the network was completed and commercially launched, with existing TDMA customers encouraged to migrate to the new system. Once the network is completed in the second half of 2004, Mobitel is planning to launch pre-paid subscriptions and multimedia messaging services. At the press conference to herald the launch, SLT said it would be investing USD200 million into the service over the next three years, adding that the initial phase of network construction had cost USD88 million. USD70 million of the funding is being provided via a loan from the Standard Charter Bank.

Whilst the majority of funds raised from this year’s share offering will be poured into Mobitel, SLT is also keen to improve its fixed line coverage, with a particular emphasis on reaching hitherto underserved rural areas. To this end it is in talks to acquire Lanka Bell, one of only two rivals it faces in Sri Lanka’s fixed line market, the other being Suntel, which is majority owned by Scandinavian operator TeliaSonera. At the end of June 2003 SLT had approximately 88% of the country’s 906,200 fixed line subscribers under its control, having invested more than LKR40 billion in upgrading its domestic infrastructure over the past five years. In that time it has added close to 565,000 direct exchange lines to push teledensity in the Colombo Metropolitan area from 9% to around 16%. During the same period overall fixed line in Sri Lanka increased from 1.7% to 4.8%, and substantial advances in network reliability were made.

Lanka Bell, backed by TransAsia Singapore, provides a full range of telephony and data services to approximately 40,000 customers, predominantly via wireless in the local loop (WiLL) technology, although it also relies on interconnection agreements with SLT to some extent. SLT began discussions to buy Lanka Bell in the second half of 2003, and the deal was given the go-ahead by the SLT board in December, with Treasury approval said to be ‘in the pipeline’ by mid-January. SLT is keen to use Lanka Bell’s WiLL infrastructure to supplement its rural network and help reduce the estimated 350,000 customers on its waiting list.

PriMetrica's GlobalComms