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Boost for YTLE in broadband race

The Edge Malaysia, August 20, 2007

YTL e-Solutions Bhd (YTLE), one of only four Malaysian companies with rights to a 2.3GHz WiMAX spectrum block, recently made a deal that gave it a leg-up on rivals. Its 70%-owned unit, Y-Max Solutions Holdings Sdn Bhd, bought 70% of Airzed Broadband Sdn Bhd for RM7 million.

The rationale is simple. Airzed provides broadband and Internet access using the 2.5GHz and 3.5GHz spectrums. Its WiFi Internet service is already available at some 200 hot spots in the Klang Valley at select outlets of San Francisco Coffee, The Coffee Bean & Tea Leaf, Dome Café, McDonald’s and Starbucks. Airzed also has hot spots in Penang, Johor, Melaka, Genting Highlands and Ipoh.

A ready network is a boost as YTLE is competing with fellow WiMAX spectrum holders, 3G spectrum holders as well as with Tier-1 operators like Telekom Malaysia Bhd, Maxis Communications Bhd and DiGi.Com Bhd for broadband clients. Moreover, with access to Airzed’s two radio spectrum bands, YTLE would have access to all three sought-after bands of WiMAX spectrum for the deployment of fixed and mobile systems.

But apart from the benefit of having more than one spectrum band at the company’s disposal, investors have few details to evaluate the deal for themselves. Very little was given out about Airzed’s earnings potential and its expansion plans. It is uncertain how long Airzed has custody of the spectrum blocks.

YTLE’s announcement said Airzed had RM356,568 in net assets and made RM40,644 net profits for the year ended June 2006. One way of looking at Y-Max’s RM7 million injection into Airzed is that the price represents 28 times its net asset value. But this does not take into account the premium of owning the 2.5GHz and 3.5GHz spectrums as well as a ready WiFi network.

An observer points out that the RM7 million cash injection into Airzed is “very little” compared with the RM300 million each WiMAX player would have to fork out to build its network. The money would be well spent if YTLE instantly gains ground over most of its competitors riding on Airzed’s network.
It is not immediately certain why Airzed’s original shareholders are willing to give up control to YTLE. Prior to its entry, Airzed was controlled by Opcom Holdings Bhd executive director Chhoa Kwang Hua (69.3%), Datuk Mukhriz Mahathir (26.7%) and Chhoa’s brother, Kuang Yaw (4%). Mukhriz is Opcom’s chairman and managing director. The trio will see their stake diluted to 30% in the enlarged entity.

Following Y-Max’s entry, YTLE is Airzed’s largest shareholder with an effective stake of 49%. Kwang Hua’s holdings are diluted to 20.79% and Mukhriz’s to 8.01%.

It is also worth noting that other new names have entered Airzed. They are Datuk Tan Ting Wong and Press Metal Bhd group CEO Datuk Paul Koon Poh Keong. Tan has a 17.22% effective stake in the enlarged Airzed, while Koon has a 3.36% effective interest. Tan, formerly an executive director of Widetech (M) Bhd, is executive chairman of a company distributing multimedia products.

It is also not certain if the change in shareholding affects Airzed’s existing partnership with DiGi. DiGi’s wireless broadband customers can ride on Airzed’s wireless service for a fee, a partnership the mobile operator used to boost its EDGE-based wireless broadband service.

Other questions have been raised, like what is the Malaysian Communications and Multimedia Commission’s (MCMC) stand on shareholding changes in companies that have been given usage of the 2.5GHz and 3.5GHz spectrums without a public tender.

“From an outsider’s perspective, there is much confusion because regulators have shunned players that have access to the 2.5GHz and 3.5GHz spectrum when picking the winners of the 2.3GHz spectrum. Players are encouraged to share infrastructure, but are they allowed to merge or have cross-shareholdings? Is the consolidation of these players encouraged by regulators?” asks a market watcher.

It is also uncertain under what terms players like Airzed have been given the use of 2.5GHz and 3.5GHz spectrums. Do they have to meet rollout targets? For 3G spectrum holders, any change in ownership of the holding entity will need the approval of the MCMC. Previous news reports mentioned that regulators are conducting a review to optimise spectrum usage and companies, which have not been using their spectrum will see it revoked. The status of this exercise, however, is unclear.

There’s also the question of whether there will be more tie-ups among the various WiMAX spectrum holders, and how that would impact the marketplace. For instance, REDtone International Bhd reportedly said it is interested in taking up a stake in eB Capital Bhd, whose unit eB Technologies Sdn Bhd has access to both 2.5GHz and 3.5GHz spectrums.

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