Merger may drag down Globe profits

In this story: Breakeven Expanding operations RELATED SITES

By CNN's Amabelle Layug

MANILA, Philippines -- A planned merger with Isla Communications is likely to drag down the profitability of the Philippines' largest mobile operator, Globe Telecom, analysts say.

The two telcos aim to finalize their merger by mid-year. Under the deal, Germany's Deutsche Telekom will swap its 40 percent stake in loss-making Islacom for 24 percent of Globe.

Globe will then have 2.5 million mobile customers and a 44 percent market share. Its main competitor is SMART, the mobile unit of the country's largest telco, Philippine Long Distance Telephone (PLDT).

Globe's key shareholders are the Ayala Corporation and Singapore Telecom, which have stakes also in Islacom. They agreed with Deutsche Telekom last year to integrate the Globe and Islacom operations.

Foreign brokerage house UOB Securities (Phils.) said the merger could cost Globe $39.5 million (2 billion pesos) -- the expected net loss for Islacom in 2001.

It said the deal would be "income-dilutive to Globe considering Islacom's net loss situation."

The brokerage house has projected $60 million (3.48 billion pesos) net income for Globe on a stand-alone basis. It predicts net income of $20.6 million (1.48 billion pesos) in 2001 for the merged company, after taking out about $39.5 million in expected net losses for Islacom.

Last year, Globe's net profit rose 65 percent to $19.8 million (1.5 billion pesos), from $18 million (940 million pesos) in 1999.

Breakeven

UOB Securities forecasts Islacom to be in a breakeven position not later than 2003, when it would have acquired additional subscribers that would generate revenue.

Globe said it expects to achieve annual operating expense savings of $31 million (1 billion pesos) and a reduction in capital expenditure of $125 million (6.3 billion pesos) over the next 18 months as a result of the merger.

During the first quarter this year, Globe posted $2 million (1.07 billion pesos) in net income, up 219% from $6 million (335 million pesos) in the same period last year.

Islacom managed a net income of $670,000 (34 million pesos) during the first quarter, a reversal from a net loss of $21 million (1.67 billion) year-on-year.

"Net income turned positive as a result of a reversal of $8.6 million (436 million pesos) in deferred taxes booked in prior years... The company's positive first quarter income was due only to a reversal of prior years' taxes," UOB noted.

Expanding operations

Globe Telecom is working to maintain its leading position in the Philippines' mobile phone industry, by inking deals with foreign investors to expand its operations.

On Monday, Globe signed a $21.7 million (1.1-billion pesos) transmission supply contract with Norway's Nera Telecommunications.

Last week, Globe also signed a $310 million contract with Finnish group Nokia, also to help it expand its GSM network to meet a growing subscriber base.

Globe has also inked a $110 million contract with Sweden's Ericsson to upgrade its digital network infrastructure.

Globe's rival SMART Telecommunications, a subsidiary of PLDT, is negotiating to sell a strategic stake in the company to Japan's top mobile operator NTT DoCoMo.

Globe Telecom
SMART
PLDT
Islacom

Note: Pages will open in a new browser window

External sites are not endorsed by CNN Interactive.