This article first appeared in The Edge Financial Daily, on December 22, 2015.

KUALA LUMPUR: Axiata Group Bhd, 38.2% owned by Khazanah Nasional Bhd, is buying a controlling stake in Nepal’s largest mobile operator Ncell Pte Ltd for US$1.37 billion (RM5.91 billion) in cash, which will give Axiata an immediate foothold in the market there.

In a filing with Bursa Malaysia yesterday, Axiata said its wholly-owned subsidiary Axiata Investments (UK) Ltd had signed a sale and purchase agreement (SPA) and other ancillary agreements with TeliaSonera UTA Holdings BV and SEA Telecom Investments BV for the acquisition of the entire issued capital of Reynolds Holdings Ltd, which in turn holds an 80% stake in Ncell.

The remaining 20% stake in Ncell is currently held by Niraj Govinda Shrestha. However, this will be transferred to Sunivera Capital Venture Pvt Ltd prior to the completion of the proposed acquisition.

Axiata said it had also signed a shareholders’ agreement with Sunivera and Bhavana Singh Shrestha to regulate the operation and management of Ncell upon completion of the proposed acquisition.

Axiata said it will fund the proposed acquisition via a combination of internal funds, debt instruments and external borrowings.

Ncell currently holds a 57.5% share of Nepal’s market in revenue terms. Ncell has 13 million mobile subscribers as of July 17, giving it a market share of 48.8%.

Axiata said NCell also holds sufficient and a good mix of spectrum portfolio, including paired spectrum of 8MHz of 900MHz, 11MHz of 1800MHz and 10MHZ of 2100MHz spectrum. Ncell’s revenue grew at a compound annual growth rate of 19.9% between financial year ended July 15, 2013 (FY13) and FY15, with earnings before interest, taxes, depreciation and amortisation (Ebitda) margin of 62.2% in FY15.

Kenanga Research telecom analyst Cheow Ming Liang remains neutral on the news as it has yet to incorporate the impact of the Ncell acquisition into its earnings forecasts.

He noted that Axiata’s debt position remains manageable at 1.92 times its Ebitda as of end-September.

“However, with the group’s recent acquisition [of a 75% stake in Digicel Asian Holdings Pte Ltd (DAH) at an enterprise value of US$221 million], Axiata may be moving to its optimal debt ratio of between two times and 2.2 times,” he told The Edge Financial Daily.

Analysts expect Axiata to undertake a cash call to fund its acquisition of Ncell.

“With cash and cash equivalents of RM4.06 billion as of Sept 30, 2015, and the purchase price [of Ncell] at close to RM6 billion, coupled with the acquisition of DAH of about RM500 million, Axiata’s free cash flow per year is about RM1.5 billion. So, it looks a bit tight,” an analyst told The Edge Financial Daily.

The analyst also said the proposed acquisition of Ncell may increase Axiata’s capital expenditure (capex), noting that the Nepal earthquake in April had caused damaged to its physical infrastructure vital to telecom players.

According to a report by CIMB Research on Nov 27, Axiata’s registered RM555 million in capex for the first nine months of FY15 and is expected to rack up to RM950 million for full-year FY15, lower than the RM1 billion to RM1.1 billion as previously projected by Axiata.

The proposed acquisition of Ncell is subject to approval from Axiata shareholders and Bank Negara Malaysia, and transfer of the remaining 20% stake to Sunivera. The transaction is expected to close by the first half of 2016.

The SPA will be automatically terminated if all parties fail to fulfil all conditions by June 30, 2016, unless otherwise agreed by all parties.

Axiata said Ncell’s strong cash flow generation with an operating free cash flow of over 22 billion rupees (RM890.59 million) per year, would further support Axiata’s dividend paying policy.

The group also said the implied last 12 months’ enterprise valuation over Ebitda of five times, including controlling premium in Ncell is an attractive valuation compared with 5.7 times and 8.4 times for South Asia and Asean peers respectively.

“[It is] consistent with Axiata’s merger and acquisition priorities of an opportunistic footprint expansion, being both very attractive strategically and financially for the group,” said Axiata president and group chief executive officer Datuk Seri Jamaludin Ibrahim.

Post-acquisition, Axiata will have presence and reach in five key countries across South Asia, besides its footprint in Southeast Asia, bringing its customers to over 280 million from 268 million currently.

Trading in Axiata’s (fundamental: 1.15; valuation: 1.7) securities and its warrants was suspended pending the material announcement yesterday, and will resume today. The stock last closed at RM5.98 per share, with a market capitalisation of RM52.72 billion.

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