Brookfield is buying Optus for A$18bil from Singtel? Its too good to be true lah!

Yesterday, Australian Financial Review reported that Singtel might be selling its subsidiary Optus to Brookfield. The potential deal is estimated to be worth around A$16-18 billion; and the reported news suggest the discussions are progressing well, and Brookfield might involve another company as a partner for the acquisition.

Shortly after, Singtel dismissed the media reports that it is looking to offload Optus. From its announcement: “There is no impending deal to offload Optus for the said sum, as reported. Optus remains an integral and strategic part of the Singtel Group and we are committed to Australia for the long term.”

A$16-18 billion valuation for Optus sounds too good to be true.

The price tag of A$16-18billion for Optus would imply a valuation of 8 times FY25E EV/EBITDA. Telstra, another Australian telco, currently trades at a similar 7x EV/EBITDA multiple but it is boasting a significantly higher ROIC of 8%, compared to Opus’ ROIC which is less than 2%. I not sure why Brookfield would want to pay for such an expensive multiple for Optus. Hence, I am somewhat sceptical on the reported deal value.

What about the cashflow?

Singtel has owned Optus for over 20 years since 2001, and Optus has generally been a large consumer of Singtel group’s capital base. Singtel will face a challenge if they sell Optus. Optus's cash flow is estimated to fund at least 20-25% of the dividends Singtel pays to shareholders. Singtel is committed to maintaining dividend levels, so if they proceed with the sale, they would need to find an alternative source to cover this significant cash flow gap in the near term.

Conclusion: Do not blindly follow the rumours

Singtel appears to offer compelling value when assessed through a Sum-of-the-Parts valuation methodology. However, it is imperative not to unquestioningly embrace market rumours. Relying solely on hearsay or speculative information can lead to misguided actions.

Therefore, always exercise caution and diligence in evaluating investment opportunities!

@TigerStars @MillionaireTiger @Daily_Discussion