Telekom Malaysia increased its hold on the country's mobile phone sector today after the merger of its cellular business with Celcom for RM1.68 billion.

The deal ended months' of negotiations and seals state-owned Telekom's control over the country's second top mobile phone operator.

German operator Deutsche Telekom AG, which holds an eight percent stake in Celcom and was understood to have veto rights, earlier objected against the merger but Celcom said it did not need Deutsche's consent for the deal.

Telekom chief executive Mohamad Khir Abdul Rahman said Celcom would buy TM Cellular through the issuance of 635.49 million new shares at RM2.65 each to Telekom.

The new shares would raise Telekom's stake in Celcom from 31.2 percent to 47.9 percent.

Mohamad Khir said Telekom would subsequently make a general offer for the rest of Celcom shares it did not own at RM2.75 each, at a 15 percent premium to current market price.

The general offer is expected to cost Telekom about RM1.98 billion but he declined to say how it would be funded.

Biggest entity

Mohamad Khir told reporters the merger of Celcom and TM Cellular would create the country's biggest mobile phone entity with a subscriber base of more than three million and a 40 percent market share.

The new group will overtake top operator Maxis Communications, which last month signed a deal worth up to RM1.6 billion to buy Time dotCom Bhd's cellular unit to boost its subscriber base by some 650,000.

Mohamad Khir said Telekom may consider taking Celcom private if its stake in Celcom rises above 90 percent after the general offer, which was expected to be completed by the first quarter of 2003.

"It's an option that we will consider," he said.

Trading in the shares of both companies was suspended today, with Telekom last traded at RM7.65 and Celcom at RM2.40.

Telekom said it has the option to terminate the general offer if it was disputed by Deutsche but Mohamad Khir reiterated the German operator's veto rights were not enforceable.

He said Deutsche supported the merger but found the general offer price too low and not reflective of the company's value.

Deutsche, which bought the shares in 1996 at nine ringgit each, gave an indicative value of three ringgit per share, he added.

Wrestled control

Telekom moved in April to take over Celcom when it snapped up a 13 percent stake from former chairman, Tajudin Ramli, whose shares were sold by a state asset manager when he defaulted on personal loans.

Telekom wrested board control in July, replacing Tajudin and three others with its own executives.

Celcom has asked police to investigate RM259 million of invoicing irregularities by the previous management. It has also sued Tajudin and two ex-directors to recover RM56 million in controversial payments. AFP