VZCZCXYZ0000
RR RUEHWEB

DE RUEHBK #3435/01 1580857
ZNR UUUUU ZZH
R 070857Z JUN 06
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 9348
RUCPDOC/USDOC WASHDC

UNCLAS BANGKOK 003435 
 
SIPDIS 
 
SIPDIS 
 
STATE PASS TO USTR JMCHALE 
 
E.O. 12958:  N/A 
TAGS: ECON ETRD ECPS EINT TH
SUBJECT: THAI TELECOM ROUNDUP:  MERGE OR DIE? 
 
REF: A. 05 BANGKOK 6901 (Telenor Buys out UCOM and TAC) 
     ¶B. 06 BANGKOK 583 (Deal of the Century) 
     ¶C. 06 BANGKOK 1549 (Shin Corp Deal is Legal: So What?) 
     ¶D. 05 BANGKOK 7124 (Court Suspends Privatization of EGAT) 
     ¶E. 06 BANGKOK 115 (Licenses without Concession Conversion) 
 
¶1. SUMMARY:  The takeover of Thailand's two leading mobile phone 
providers by foreign companies and the political crisis unleashed by 
the prime minister's family's sale of its stake in Shin Corporation 
to Temasek of Singapore has fundamentally altered the context of 
both the telecom business and regulatory policy.  The National 
Telecommunications Commission faces political protest against the 
sale of national assets to foreigners and consumer impatience with a 
deterioration in the quality of mobile phone services.  Prime 
Minister Thaksin's policies of privatization of state-owned 
enterprises (SOEs) and trade liberalization are stalled and the 
government's "caretaker" status has led to a shift in power in favor 
of SOEs TOT Plc and Cat Telecom Plc.  Dashed expectations of 
conversion of the concessions previously granted by the SOEs to 
private companies, of the rollout of third-generation (3G) services, 
and of allocation of new frequencies have forced a reassessment of 
where the sector is headed.  A leading telecom analyst offers a 
solution in the form of merges between SOEs and listed companies 
that is useful for identifying the issues at stake.  In response to 
the above environment, the regulator is drafting regulations on 
foreign business control and interconnection, among others.  While 
unlikely to be of great consequence either to telecom companies or 
the sector as a whole, the Embassy thinks that the regulations on 
foreign business control will have a net negative effect on 
shareholder rights and investment opportunity in Thailand's telecom 
sector.  END SUMMARY 
 
NEW ENVIRONMENT FOR THE THAI TELECOM SECTOR 
 
¶2. AFTERMATH OF THE SHIN AND TELENOR DEALS:  The exit of the 
Shinawatra and Bencharonkul families from the Thai telecom sector 
has fundamentally altered the context within which all players in 
the industry now operate.  As set out in REFs A and B, the two 
largest mobile telecom services providers, Advanced Info Service Plc 
(AIS) and DTAC, although still legally Thai-owned, are effectively 
foreign-controlled entities as a result of the takeover of Shin 
Corporation by Singapore's Temasek Holdings and the buyout of both 
UCOM and Total Access Communications (TAC) by Norway's Telenor.  The 
takeover of Shin, the parent company of AIS and the larger of the 
two, has sparked a political crisis in which economic nationalism 
has flourished.  Popular protest against both the foreign purchase 
of Thai assets and Prime Minister Thaksin's policies of sectoral and 
trade liberalization has become a staple of Thai political life (REF 
C). Ironically, the self-proclaimed reformers such as Rosana 
Tositrakul, now Bangkok senator-elect, who criticize Prime Minister 
Thaksin and his "cronies" from reaping ill-gotten gain from RTG 
policies, have emerged as defenders of Thailand's monopolistic and 
inefficient SOEs. 
 
¶3. PRIVATIZATION ON THE ROPES:  The Thaksin government's own 
missteps in privatizing SOEs in other sectors have spilled over into 
the telecom arena.  The March 2005 court-ordered annulment of the 
RTG's corporatization of the Electric Generating Authority of 
Thailand (EGAT), the principal state-owned electric power utility, 
in conjunction with a November 2005 ruling suspending the initial 
public offering of shares of the corporatized entity further reduce 
the likelihood that the government will proceed with the 
privatization of either TOT Plc or CAT Telecom Plc in the near 
future (REF D). 
 
¶4. RTG POLICY ON HOLD:  Reinforcing this unexpected political 
rehabilitation of Thailand's state-owned enterprises has been a 
shift in bureaucratic power in favor of the TOT and CAT Telecom. 
While the RTG is in "caretaker" status, policy initiatives have been 
on hold because the bureaucrats are hesitant to act on anything 
other than routine business.  With no exit from the current 
political crisis in view, private investors have likewise decided to 
postpone major decisions.  Additionally, the Ministry of Information 
and Communications Technology (MICT) is headed by an acting 
caretaker minister.  Mr. Sora-at Klingpratoom, who had advocated 
listing both TOT and CAT, has stepped down as minister in a move in 
the factional politics within the ruling Thai Rak Thai Party. 
 
¶5. CHANGING OF THE GUARD AT TOT:  Within TOT, the old guard has 
similarly rebounded.  The TOT board of directors dismissed President 
Teerawit Charuwat effective May 12, ostensibly for financial 
underperformance and the failure to effect an initial public 
offering of shares.  Mr. Teerawit was formerly finance chief at the 
state broadcaster MCOT Plc.  He was chosen in 2005 over several 
senior TOT executives for the position.  In his defense, Mr. 
Teerawit claimed that the extra expenditures of 1.14 billion baht 
last year that cut into profitability were for one-off items such as 
licenses. Without them, net profit would have risen 9.4 percent to 
10.57 billion baht.  He also attributed problems he experienced to 
political interference and lack of cooperation from the senior 
executives.  Chamras Tantrisukorn, a senior executive, was named 
acting president. 
 
THE NEW POLITICAL LANDSCAPE FOR THE NTC . . . 
 
¶6. THE NTC IN THE SPOTLIGHT:  With this shift in the balance of 
power, the challenges facing the National Telecommunications 
Commission (NTC), the sector's regulator, have changed.  The exit of 
the prime minister's family from the sector has removed an 
incalculable political weight from the NTC's shoulders, and thereby 
changed the dynamics of the interaction among the commissioners and 
the private telecom companies.  At the same time, the popular 
political outcry over the foreign purchase of the Shinawatra 
family's assets has put the NTC on the spot, particularly its 
administration of the provisions of the 2001 Telecommunications 
Business Act (TBA) concerning foreign ownership, which were recently 
amended to lift the 25 percent cap on foreign ownership specified in 
the original law to effectively 49.9 percent as provided by the 
Foreign Business Act (FBA).  Given recent calls by anti-Thaksin 
activists to abolish independent bodies established by the 1997 
Constitution that have "failed to carry out their duty in providing 
checks and balances," the commissioners must consider their actions 
in terms of the NTC's own institutional position in the current 
political environment. 
 
¶7. UNHAPPY CONSUMERS:  New practical and highly visible problems 
also require attention, including especially interconnection and 
number portability.  Most important, the sharp increase in 
subscribers resulting from a price war between AIS and DTAC this 
year has forced the NTC to grapple with challenge of establishing 
neutral interconnection charge rules for operators.  During peak 
hours, success rates in completing a connection have fallen to 
single digits requiring users to make multiple attempts before they 
can connect.  Newspapers publish frequent stories about mobile phone 
"traffic jams" and cite polls showing that the overwhelming majority 
of mobile phone users are dissatisfied.  A May ABAC poll of AIS, 
DTAC, and TrueMove (formerly True) customers, for example, found 
that 77 percent feel they are being "treated shoddily by their 
service provider."  No provider fared particularly well, and 46 
percent of respondents said they were dissatisfied with the role of 
the NTC (38 percent were satisfied and the rest did not know). 
 
¶8. THE INTERCONNECTION ISSUE AND TOT:  Each major mobile phone 
provider maintains its own network.  In the absence of rules 
obliging operators to accept incoming calls from other networks in 
exchange for a portion of the revenue, operators have had limited 
incentive to build out their switching capacity.  Under the current 
system, unlike in many other countries, the caller's cellular 
service provider earns money when a call is made, but the receiving 
network does not earn anything for taking the call.  When call 
volume exceeds interconnection capacity, the default response has 
been for private operators, particularly the CAT Telecom 
concessionaires DTAC, TrueMove, and Digital Phone Company (DPC), to 
route calls through state-owned TOT, which collects monthly fees 
from them (through CAT Telecom).  The recent rise in number of 
callers and call volume has overwhelmed existing interconnection 
infrastructure and forced the regulator to act.  While the private 
operators will need to make significant investments to ensure 
adequate coverage, the elephant in the room is TOT's dependence on 
the revenue stream from the access fees paid by CAT concessionaires. 
 According to a Phatra Securities estimate, the net access charges 
TOT received from DTAC and TrueMove alone made up 11 percent of its 
2005 revenue of 60.2 billion baht. 
 
¶9. MORE CONFUSION LIKELY:  While the NTC is currently drafting 
regulations to provide for a new interconnection regime, its 
approach is to request that the operators prepare offers. 
Contradictory language in the draft regulations raises the question 
of whether just the SOEs or all players should prepare offers. 
Embassy contacts familiar with the drafting process agree that the 
regulations will allow for TOT to continue to receive the access 
fees for calls routed through TOT by the private operators.  They 
also think that new regulations providing for revenue sharing should 
eventually encourage buildout of the infrastructure to facilitate 
interconnection, which promises to ease the traffic jam.  But 
introducing the new regulations will likely introduce a second 
accounting system for tracking interconnection charges, thereby 
adding to the complexity of the regulatory framework. 
 
. . . AND INVESTORS 
 
¶10. SHARE PRICE CHANGES:  Investors have taken a hard look at their 
holdings of listed company shares and adjusted accordingly.  As of 
June 7, Shin Corp had lost nearly 35 percent of its market 
capitalization since January 23.  Shares of AIS closed at 90 baht on 
June 7, as against a 52-week high of 114 baht and a low of 85 baht. 
 
 
¶11. CONCESSION NON-CONVERSION:  Investors and industry players are 
also casting aside the familiar conceptual frameworks for 
understanding the development of the telecom sector going forward. 
The reality that concession conversion is not on the horizon has 
finally sunk in.  As one foreign analyst expressed the point, "the 
concessions aren't going to go away until they get CAT and TOT to 
agree to end them. Otherwise they'll have to wait for another seven 
or eight years," at which point the SOEs will retain the network 
assets.  More players now expect that the TOT and CAT Telecom will 
hold out until the concessions terminate.  (Note:  a list of the 
principal concessions is set out in REF E. End note.) 
 
¶12. 3G ON HOLD:  Last year's hope that NTC-issued licenses for 
third-generation (3G) technology services offer a regulatory 
mechanism for the concessionaires to get out of the concession 
agreements has faded.  Service providers have hesitated to go 
forward in face of the large amount of capital investment required 
to roll out 3G services, particularly in view of uncertain consumer 
demand for them, a concern we identified in REF E. 
 
¶13. SPECTRUM NON-ALLOCATION:  Although Thai Mobile, a TOT-CAT 
Telecom joint venture has reportedly been allocated bandwidth in the 
1900-2000 MHz range for 3G services under a 2004 (i.e., pre-NTC) 
agreement with the then (i.e., pre-CAT Telecom) Communications 
Authority of Thailand, the basic fact weighing on the sector is that 
the regulatory structure required for allocation of spectrum is not 
yet in place.  Current law set forth in the Radio and Television 
Frequency Allocation Act provides that both the NTC and the National 
Broadcast Commission (NBC) must approve new allocation of spectrum, 
including frequencies required for 3G.  The NBC, however, has yet to 
be formed.  In November 2005 the Central Administrative Court ruled 
to invalidate the final seven candidates named to the NBC when it 
considered a petition by an unsuccessful candidate protesting 
irregularities in the selection process. The candidates had been 
approved by the Senate but had not yet received royal endorsement. 
The Prime Minister's Office decided to challenge the decision rather 
than push for amending the law to give the NTC full authority.  The 
case is pending before the Supreme Administrative Court (SAC).  In 
the unlikely event that the SAC reverses the lower court decision, 
no one expects the NBC to form in the political environment. 
 
SEARCHING FOR A NEW PARADIGM 
 
¶14. MERGE OR DIE?:  In a February 2006 research report entitled 
"Merge or Die," Richard Moe, the senior telecom analyst at Macquarie 
Securities, advanced a new framework for the sector.  He also 
radically revised the firm's investment recommendations, identifying 
TAC rather than AIS as the listed player with the greatest upside 
potential.  Moe is a longtime observer of the Thai telecom scene 
whose views are widely read, so his change of mind merits attention. 
 His vision of a market duopoly organized around a TOT/AIS axis and 
a CAT Telecom/DTAC/TrueMove axis has put the idea of mergers into 
the public domain, where it is a subject of discussion, including at 
the NTC.  A full duopoly model along the lines set out below, he 
contends, would create moderate competition and ensure strong cash 
flows and balance sheets.  Two strong telecom operators would be in 
position to aggressively expand networks, increase quality and range 
of services, and provide an economic return on investment. 
 
¶15. MERGERS WOULD SOLVE CURRENT PROBLEMS:  Beginning with the 
assumption that the concessions will not be converted, Moe casts 
aside the article of faith that the private operators will inherit 
the SOEs telecom networks.  Despite their technical and marketing 
expertise, private telecom  concessionaires enjoy limited upside 
because the terminal values belong to TOT and CAT Telecom.  With the 
right to take over the networks, the SOEs possess assets with real 
value that could be priced by the market in conjunction with public 
offerings of TOT and CAT Telecom shares.  In this context, mergers 
of the listed telecom operators with the TOT and CAT Telecom 
(subsequent to their IPOs) would resolve the concession issues and 
provide the listed telcos with an indefinite operating life.  The 
problems of life after the concessions, interconnection charges, and 
over-indebtedness all disappear. 
 
¶16. AND RE-ESTABLISH THAI MAJORITY OWNERSHIP:  In Moe's view, some 
configuration of mergers between the foreign-controlled private 
operators and the SOEs would also re-establish bonafide Thai 
majority ownership (he outlines several options), thereby 
eliminating the political risk for AIS and DTAC stemming from the 
perceived control of spectrum by foreign government entities, and 
the foreign control of Thai assets more generally.  Politically, he 
emphasizes, it is difficult to imagine the RTG asking the TOT and 
CAT Telecom to take a bullet for foreigners, which is the way any 
effort to strip the SOEs of their revenue under the concessions 
could be portrayed.  Telenor and Temasek are in a weak position to 
protest termination of the concessions because the contracts were 15 
years old and known to them (lenders have always looked at the 
letter of the contracts rather than assuming that the 
concessionaires will inherit the assets) and they arguably violated 
the spirit of the Thai Foreign Business Act.  Additionally, the 
point at which the NTC issues (or does not issue) licenses for 3G 
services affords the RTG the opportunity to pose a choice between 
merger and status quo with existing concessions. 
 
¶17. ADDITIONAL BENEFITS:  Moe adds that creation of two full-service 
operators would also provide for more socially equitable 
reallocation of frequencies.  If TOT gave up fixed line concessions, 
for example, and CAT Telecom gave up DPC and 25MHz of spectrum in an 
effort to unwind the cross-holdings between the two groups, CAT 
Telecom would be able to provide cellular service in rural areas and 
facilitate greater competition there. 
 
¶18. NOT UNPRECEDENTED:  While radical in today's environment, Moe's 
vision is not unprecedented.  In 2004, Shin Corp CEO Boonklee 
Plangsiri said that AIS is a takeover target and TOT is a potential 
buyer, as Moe is the first to point out.  While the idea may be 
hypothetical for most industry players, for Mr. Boonklee a TOT/AIS 
merger has an obvious practical value:  it opens up the possibility 
of a new job. 
 
¶19. BUT NOT A SURE THING EITHER:  Moe admits the obstacles: 
distrust among the concerned parties, nationalism, risk of 
bureaucratization of the private telcos, and stubborn investor hope 
for a concession conversion windfall.  It is widely known that TOT 
and CAT Telecom--especially their employee unions--do not trust the 
private companies, and do not have much use for each other either. 
Particularly in the current political environment, it is reasonable 
to expect opposition to the listing of the SOEs on the grounds that 
they are "national assets".  While the unions may over-estimate the 
long-term financial health of TOT and CAT Telecom, their thinking is 
a political fact.  Additionally, the market is still in denial. 
Despite Cabinet and NTC statements that the RTG will not force 
concession conversion, share prices of listed telcos still indicate 
that some investors expect conversion. Moe readily admits that there 
may be no mergers, particularly in the absence of someone within 
government or one of the other entities who champions the idea.  His 
analytical point is that in the absence of mergers, the Thai telecom 
market structure will remain sub-optimal, with too many players and 
too much redundant network leading to lower returns on capital. 
There also exists the temptation to resort to a premature rollout of 
3G as a means of unwinding the concessions, which would be wasteful 
of capital. 
 
DRAFT REGULATIONS ON FOREIGN BUSINESS CONTROL 
 
¶20. MAIN PROVISIONS:  The issue of greatest interest to foreign 
investors that the NTC is presently considering is the draft 
regulations on foreign business control.  First proposed in March, 
they have undergone several revisions and are still pending.  The 
draft regulations ostensibly constitute the implementing regulations 
for the revision in the TBA that raised the cap on foreign 
investment in telecom firms from 25 percent limit in the original 
TBA to the equivalent of 49.9 percent prescribed by the FBA.  They 
set out standards for what constitutes foreign business control or 
tendency toward foreign business control and require holders of type 
2 and type 3 licenses to report to the NTC.  In the case of 
violations, the telcos are to propose corrective measures.  If there 
is any question of "national security" (the example most commonly 
discussed, for example, is where an entity owned by a foreign 
government controls radio spectrum) then the NTC would refer the 
issue to the competent agency. Sanctions in the case of violation go 
as far as revocation of a license, but no draft to date has set out 
a clear schedule of sanctions and in all drafts to date the NTC 
reserves considerable discretion on how to handle cases of 
violation. The Commissioners have said, and the Ministry of Foreign 
Affairs has also confirmed, that the forthcoming draft will include 
safe harbor provisions that ensure the regulations do not contradict 
any international commitments undertaken by the RTG, including under 
the World Trade Organization and in free trade agreements. 
 
¶21. CLOSING A LOOPHOLE?  In practice, the FBA has restricted foreign 
ownership of firms in certain sectors to a minority share, but has 
allowed foreign control (through such mechanisms as nominee 
structures and preferential voting arrangements).  Telenor and 
Temasek structured their buyouts of UCOM/TAC and Shin Corp/AIS 
respectively in such manner.  By setting out criteria for what 
constitutes control, the draft regulations propose to close a 
loophole that has long existed in Thai business practice.  NTC 
commissioners emphasize that the purpose of the regulations is to 
put in place a legal process whereby concerns about issues such as 
"national security" may be evaluated rather than being left to the 
political process. 
 
¶22. OR SQUARING THE CIRCLE?  Industry observers agree and RTG 
officials privately admit that the regulations are a response to the 
political furor over the Temasek buyout of Shin.  On the one hand, 
the NTC is responding to domestic political concern about foreign 
control of what many Thais see as national assets.  Hence the 
specification of criteria for foreign control, and the visible 
display that the NTC is doing its job.  On the other hand, the 
Commissioners wish to avoid discouraging foreign investment.  Thus, 
the letter of the draft regulations notwithstanding, Dr. Sudharma 
Yoonaidharma, the Commissioner who drafted the regulations, told 
foreign diplomats in April, "the regulations seem to be 
life-threatening things, but they are not.  They just trigger 
disclosure (i.e., to clarify ownership), and the disclosure is the 
same as required by other agencies."  Embassy contacts agree that 
the reason why it has taken the NTC so long to draft the regulations 
is the inherent conflict between these two objectives. 
 
¶23. IMPACT UNCERTAIN:  Industry observers are divided on the likely 
impact of the proposed regulations, because it is unclear whether 
their effect will be to calm the political firestorm over foreign 
buyouts in the telecom sector without substantive change or to force 
DTAC and AIS to become "Thai" companies again through divestiture or 
other means.  An attorney who has worked for both Temasek and 
Telenor emphasized to econoff that the provisions of the 
regulations, if enforced, would have a negative effect on basic 
shareholder rights. Other attorneys, also with long experience in 
Thailand, are more sanguine.  If the RTG were seriously interested 
in limiting foreign control of companies, one emphasized, the NTC 
regulations would spell out specific thresholds for action on voting 
rights. They do not.  Parliament has had the opportunity to tighten 
up the law on this issue, and has chosen not to act.  The most 
common opinion among knowledgeable observers expressed to econoffs 
is that companies will turn to lawyers and advisors to devise new 
legal solutions to ensure compliance with the letter but not the 
spirit of the law (i.e., structures that are more sophisticated than 
the now discredited nominee arrangements but achieve essentially the 
same end).  The Embassy has also confirmed that DTAC, for example, 
is adjusting some of its positions in advance of the release of the 
regulations. 
 
¶24. BROADER APPLICATION?  A common question among non-Thais is 
whether the regulations on foreign business control in the telecom 
sector will set a precedent for similar restriction in other 
sectors.  Legal experts agree that because the telecom sector has 
its own regulator, its own basic law, and industry and government 
alike see the draft regulations as being limited in application 
accordingly, that the direct effect on other sectors will be 
negligible.  Legally speaking, they do not expect any effect until 
the regulations are tested in court.  Several attorneys also 
indicated to econoff that the RTG authorities can pursue action 
against a foreign-dominated firm if they so desire under the 
provisions of the FBA already.  Equity analysts, however, see more 
risk.  As one Bangkok-based analyst explained, for investors the 
problem is not the specific legal content or precedent of the 
telecom regulations but the broader political environment that 
prompted the NTC to draft the regulations on foreign control in the 
first place. 
 
COMMENT: 
 
¶25. The Embassy agrees that the political and regulatory environment 
in the Thai telecom sector has changed fundamentally as a result of 
the Shin deal, the political crisis it sparked, and the halt in 
progress on the Thaksin government's policies of sectoral and trade 
liberalization.  While no one can predict whether the telecom sector 
will adapt by way of mergers as suggested, we think that the major 
players need to come to terms with the reality that concession 
conversion is effectively dead, that the rollout of 3G will be 
slower and more expensive than envisioned, and that the formation of 
the NBC and allocation of new frequencies remain on hold. 
Similarly, the ubiquity of mobile phones in Thailand ensures that 
the NTC will remain in the political spotlight even in the absence 
of controversy over deals involving foreign players. 
 
¶26. We also think that, collectively, recent developments represent 
a net deterioration in the investment and business climate in 
Thailand's telecom sector.  In attempting simultaneously to respond 
to economic nationalists at home seeking to restrict foreign 
business activity and to reassure foreign investors, the NTC's draft 
regulations on foreign business control have rendered Thai policy 
more, not less, ambiguous.  At the very least they promise to have a 
negative effect on basic shareholder rights.  In the current context 
of political crisis and policymaking paralysis, we expect the RTG to 
reaffirm its WTO commitment to liberalize the Thai telecom market 
this year, but to do so in a way that minimizes the change required, 
most likely by asserting that mobile services are not covered. 
BOYCE