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SingTel Z74.SI’s Latest Amobee Acquisition

SingTel Z74.SI’s Latest Amobee Acquisition
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When the largest market capitalisation company on our local bourse announces an acquisition bid, especially one that is its first major overseas acquisition since 2007, it is little surprise that analysts are scrambling behind their research desks making sense out of the news.

On 5 March, Singapore Telecommunications (Z74.SI) announced that it has signed an agreement to acquire US-based Amobee for approximately US$321 million. Separately, the telco unveiled a new organisation structure that entails three units – Group Consumer, Group Digital Life and Group ICT – to adapt to the changing industry landscape and business focus.

Without a doubt, focus of the announcement was the Amobee acquisition. The target is a mobile advertising solutions provider that is founded in 2005, with current customers including prominent technology players such as Ebay, Google, Skype, Zynga and etc. Through this deal, SingTel hopes that its capabilities in the fast-growing mobile advertising and marketing industry can be strengthened.

Following the announcement, research houses have largely issued positives. Phillip Securities viewed the acquisition as ‘a move in the right direction’, highlighting that SingTel is the industry leader in the mobile market and will be able to leverage on its vast network of more than 400 million mobile subscribers for this new business. The house noted that profitability of the local telcos has been eroded by high handset subsidies, in consequence from their aggressive effort to drive smartphone penetration. Hence, this deal presents an opportunity for SingTel to monetise its earlier investments. Accordingly, Phillip maintained its ‘Accumulate’ rating and target price of $3.31.

However, one research house has stood at the other end and downgraded its rating to ‘Sell’ from ‘Hold’. Though acknowledging that the acquisition is far-reaching in its implications for the future and the orgainsational restructuring is broad in scope, Kim Eng termed the development as ‘fail to impress’. The house is cognizant that these initiatives would only bear fruit in the longer-term, while SingTel’s already-challenged margin could be squeezed in the short-term due to a spike in operating costs. In addition, though the US$321 million acquisition tag is well-affordable and thus unlikely to affect the telco’s dividend, this may be a prelude to more acquisitions which could compromise its dividend paying capacity. Together with the rating downgrade, Kim Eng reduced its target price to $2.80 from $2.95.

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