􀀗 Rejection of KT-KTF merger would be a
“lose-lose” for KCC; approval expected
􀀗 Bundling to aid KT against LGP/cable
􀀗 OW on KT/KTF/SKT; UW(V) on SKB and
downgrade LGT to UW from N
After the Fair Trade Commission’s (FTC) approval of the
KT-KTF merger yesterday, we see little risk of it being
rejected by the KCC (Korea Communications Commission,
the telco regulator) on “pro-competition” grounds. Rejection
would result in a SKT-led monopoly, hurting competition
and, eventually, investment. This would be a “lose-lose” for
the regulator; thus, we believe the merger will go through
with pro-investment conditions as was the case when SKT
acquired management control of SKB.
Increased emphasis on service bundling would be the key
change post-merger. In this scenario, we see KT-KTF
gaining at the expense of the LG Group telcos (LGT, LG
Powercomm) and the cable operators. Bundling would limit
KT’s fixed line losses as KTF’s strength in mobile service
more than offsets the strength of its single-service
competitors, namely LGP and cable. Cable’s lack of mobile
and LGT’s weak mobile offering limit their ability to
compete when their peers move from single-service to bundles.
We reiterate our OW on KT on lower top-line pressure in the
mid- to long term and lower marketing expenses in the near
term. After the recent buyback announcement, KT now
offers a 10% cash yield in 2009e. On pro forma numbers, we
expect KT-KTF to generate earnings growth of 82% YoY in
2009 and 19% YoY in 2010. We remain OW on SKT: its 9x
2009e PE is attractive vis-à-vis 21% YoY earnings growth
this year. We remain UW(V) on SKB due to continued
pressure on the bottom-line.
We downgrade LGT to UW from N. We regard it as the
weak link in LG Group telcos’ bundling strategy. LGT’s
increasing technological marginalization, impending (and
expensive) transition to 4G, unexciting earnings prospects,
and relatively weak balance sheet put it at a severe
disadvantage to its competitors.