Trials and tribulations since IPO

Go (formerly Maltacom) is a quadruple play telecoms provider. It is the former incumbent in fixed line telephony (for which it still carries universal service obligations), and was the second entrant in mobile telephony (where Vodafone Malta was the incumbent). It was also the second entrant (if one excludes Multiplus, which was acquired by Maltacom) in TV. Data completes the rest of the quadruple offering – best illustrated by the Homepack offering. Go has a significant market share in each of the four market segments.

In May 2006 there was a major corporate action, when Emirates International Telecommunications (Malta), which forms part of Tecom Investments, acquired the remaining 60 per cent of the shares held by the government of Malta. The new Go management decided that growth potential in Malta was limited, and decided to use the substantial cash pile, and debt, to fund an overseas acquisition (Forthnet). It also made a local investment (Bell Med). Most recently, there has been a major cut in the dividend.

The company has led a sometimes tortuous existence since listing. It has lost around €70 million in value (by reference to market cap) in that time. Has the market got this right? Is there an opportunity to profit from a substantial undervaluation or is there further to go?

Let us speculate as to what the bears are seeing. A major portion of that value attrition can be attributed directly to the shifting goalposts in respect of the regulatory regime the company was subject to – the company was sold as a monopoly, and priced as such, but it was subsequently forced to give up its monopoly – arguably without commensurate compensation.

As deemed compensation, it was allowed to enter the mobile market. Even here however, it was forced to sell its stake in Vodafone and on terms different from those initially envisaged. It is more than likely that the monopoly + Vodafone holding entity would have financially outperformed what it was substituted for – if only for the fact that its stake in Vodafone would have been in a mobile monopoly.

Another major portion of the value attrition can be attributed to the unattractive dynamics of the industry itself, as opposed to a common misconception that the reason must be that the company was badly run in the past. It is a ‘me too’ industry which requires slavish commitment to capital expenditure, on pain of losing your entire client base through migration to a competitor. The constant spend has, at best, stemmed the haemorrhage potential, not driven margins or absolute returns (much less so return on invested capital). It is also an industry which is heavily regulated, most often to the detriment of the incumbent. In Go’s case, it is easy to sympathise with the notion that in Malta’s case it is more difficult to drive down unit costs given the diseconomies of scale. Arguments of this nature have consistently fallen on dead regulator’s ears.

(This article will be continued next week.)

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This article is the objective and independent opinion of the author. The information contained in the article is based on public information. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.

Mr Webster is an equity analyst at Curmi and Partners Ltd.