An apparently reversed decision about the NT$30 billion acquisition of KG Telecommunications Co (和信電訊) by Far EasTone Telecom-munications Co (遠傳電信) gave analysts a chance to re-examine the position of the two companies.
As KG Telecom left open the possibility of future merger talks with any company and Far EasTone remained silent over the issue, analysts said the deal is not yet dead, and is essential for the companies' long-term survival in the telecom industry.
KG Telecom, the nation's fourth-largest mobile service operator, decided Friday not to extend a letter of intent, signed on July 17, with Far EasTone, the nation's third-largest operator.
Under the agreement, Far EasTone would buy its smaller rival for about NT$30 billion in a cash-and-stock swap. The company was originally slated to sign the formal takeover agreement with shareholders of KG Telecom yesterday.
But one analyst said the letter's expiration doesn't mean the merger has completely collapsed.
"The reason why Far EasTone has remained silent about the matter since Friday is probably because they want to leave room for further discussion," said Hsu Pei-hsuen (
KG Telecom's chief financial official, Yin Te-yang (
Hsu said there is still likelihood of a merger between Far EasTone and KG Telecom, because "both parties want to see the acquisition through, as the local mobile-service market is nearly saturated."
Far EasTone needs to tie up with its smaller rival because a larger customer base would not only help it close the gap with market-leader Taiwan Cellular, but also lower its average costs in setting up third-generation (3G) networks, the analyst said.
The proposed merger was originally expected to boost Far EasTone's customer base to some 7.7 million users and create the No. 2 cell phone operator in Taiwan, after Taiwan Cellular's 8.6 million users, and ahead of state-run Chunghwa Telecom Co's (中華電信) 7.67 million users.
KG Telecom has no room to expand or to profit unless it links up with other telecom operators who have 3G licenses, providing it with a foothold in the future 3G market, Hsu said.
Another analyst attributed the failed merger to a lack of consensus on financial terms among Far EasTone and KG Telecom after Far EasTone completed due diligence on KG Telecom last week. In a corporate merger, during the due-diligence period the buyer is authorized to exam the books to further understand the target company's assets and liabilities.
"Far EasTone may regard the proposed price as unacceptable after closely examining KG Telecom's financial status," said Gary Lai (賴晴風), a researcher at Insight Pacific Investment Research (月涵證券) in Taipei. He cited losses of KG Telecom's subsidiaries such as KGEx.com Co (和宇寬頻) have created huge financial burden on the parent company.
The downsizing of NTT DoCoMo Inc's investment plan in KG Telecom is another stumbling block.
"DoCoMo originally was upbeat about linking up with Far EasTone to facilitate its [i-mode service] development in Taiwan," Lai said.
DoCoMo, which owns 21.4 percent of KG Telecom, was expected to purchase a 23 percent stake in the new venture to be formed from the merger of Far EasTone and KG Telecom. But the leading Japanese mobile phone operator said last month that it would scale back the planned investment after receiving pressure from investors to stop earmarking funds for foreign ventures.
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