A surprise investment in KG Telecommunications Co (和信電訊) by Japanese partner, NTT DoCoMo Inc, came with the promise to cement their relationship and increase greater cooperation, the two companies said.
Analysts agree this is true, but said it only tells half the story. The other part involves a 45 percent discount on shares, low revenues and other factors, which indicate KG Telecom needed a quick cash infusion, they said.
NTT DoCoMo on Monday announced plans to spend up to NT$1.87 billion (US$55 million) to increase its stake in KG Telecom from 20 percent to 21.4 percent by Friday.
To get there, the Japanese powerhouse will pay NT$30 per share for KG Telecom stock, a 45 percent discount to the NT$55 a share price paid last November when DoCoMo made its initial investment in the Taiwanese firm.
The 21.4 percent stake gives the Tokyo-based DoCoMo the right to two seats on KG Telecom's board, according to research notes released from the Hong Kong and Shanghai Banking Corp (香港上海匯豐銀行).
"I don't see a good reason for DoCoMo to take this position," said one analyst. He pointed to low revenues and a sizable debt payment as two major factors behind the cash infusion.
Last year, KG Telecom made a costly switch in equipment suppliers for its second-generation mobile Internet network from US-based Lucent Technologies to Finland's Nokia Oyj, the biggest maker of mobile phones. Since equipment varies from vendor to vendor, the change to Nokia has forced KG Telecom to replace a much larger portion of its existing network than if it had stayed with Lucent.
One analyst estimated KG Telecom has had to spend an additional US$200 million to US$350 million for completion of network construction. KG Telecom did not return calls to verify or discount the figure.
* NTT DoCoMo will spend up to NT$1.87 billion to increase its stake in KG Telecom.
* The firm will pay NT$30 per share for KG Telecom stock.
* The 21.4 percent stake gives the Tokyo-based DoCoMo the right to two seats on KG Telecom's board.
The company also suffers from being at a low place on the industry totem pole.
Although KG Telecom claims it has 3.84 million subscribers, analysts say the company accounts for just 10 percent of the industry's total revenue, placing it fourth in the pecking order of Taiwan's mobile telecom industry.
By contrast, the number three firm in the market, Far EasTone Telecommunications Ltd (遠傳電信), takes in an estimated 23 percent of industry revenue with 3.7 million customers.
"So even though KG Telecom says they have more subscribers, their market share is about 50 percent lower than Far EasTone," another analyst said.
Although a temporary cash flow problem might have spawned the increased stake, analysts did agree that KG Telecom should be strengthened by the deal.
The success of DoCoMo's mobile Internet services in Japan and the technical expertise the company can bring to their Taiwan partner suggest KG Telecom's market position could improve quickly once new mobile phones are available for second-generation mobile Internet service.
"Currently, I don't see any positive technical contribution from DoCoMo. [KG's] service is the same as other market players. But I think in the future, they will align to launch data access services," said Nathan Lin (
KG Telecom launched its second-generation mobile Internet service earlier this year, despite the fact there are not many handsets on the market that can be used with the service.
Currently, the choice is limited to a few Motorola handsets, which can only handle speeds of up to 36k, far slower than the 115k the system is capable of offering.
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