Thursday 29 Feb 2024
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This article first appeared in The Edge Malaysia Weekly on April 12, 2021 - April 18, 2021

AXIATA Group Bhd and Telenor SA are back at the negotiation table. If there are scars from the failure to combine their businesses back in 2019, they were not evident from the demeanour of the management of the two telecommunications giants at the press briefing announcing the second attempt to merge last Thursday. They appeared confident that the exercise would go through this time around.

Last Thursday, Axiata and Norway’s Telenor surprised the market with the announcement that they were in “advanced discussions” to merge their Malaysian telco operations. The merger of Celcom Axiata Bhd and Digi.Com Bhd will see Axiata and Telenor having 33.1% each in the MergeCo, or Celcom Digi Bhd.

Axiata says the consolidation, and the confidence that the merger will succeed this time around, is due to the fact that the challenges faced by the industry have intensified over the last two years.

Hyper competition, both from telecommunication operators (telcos) and mobile virtual network operators (MVNO) vying for the same customers in a heavily penetrated mobile subscriber base, is among the main challenges facing the industry, the group says.

Datuk Izzaddin Idris, CEO of Axiata Group Bhd, will become the chairman of Celcom Digi (Photo by Suhaimi Yusuf/The Edge)

The industry is also facing continued downward pressure on data pricing, as well as ongoing capital expenditure pressures, with more than RM4 billion per annum needed to keep up with quality and the rising capacity demands from consumers, says Axiata.

“These challenges remain the driving force behind the merger, which aims to create a truly resilient and future-proof entity. The result of which we can expect to create a MergeCo with the necessary competitive scale, competencies and vast experience coupled with stronger integrated and cost-efficient networks and overall efficient and leaner operations.

“Its stronger balance sheet will also help in driving future investments in the right areas to create long-term sustainability,” Axiata says in a written reply to questions from The Edge last Friday.

Axiata also points out that the competition is not just from mobile players, but also convergence players, notably in the OTT (over- the-top) space.

“This is what the merger is all about, predominantly to prepare ourselves for the complexity and intense competition in the years ahead, in which both companies share a common vision,” it states.

Jorgen Rostrup, executive vice-president and head of Asia of Telenor SA, will become the deputy chairman of Celcom Digi (Photo by Telenor Group)

Indeed, the telco industry is facing immense competition from players seeking to grow market share in a country where mobile penetration stands at 139% of the population, in addition to changes in the regulatory environment.

The government’s Jalinan Digital Negara (Jendela) initiative, which aims to speed up the rollout of the 5G network in the country, requires telcos to invest, and quickly, to meet national aspirations in digitalisation.

First, Jendela is pushing telcos to migrate their 3G network to 4G, with the former to be shut down by December. This means telcos will have to invest quickly to set up 4G network infrastructure across the country to meet the deadline.

A recent tender to construct 1,661 new sites across the country for the expansion of the 4G network is said to be worth RM4.6 billion.

Idham Nawawi, CEO of Celcom Axiata Bhd, will become the CEO of Celcom Digi (Photo by Suhaimi Yusuf/The Edge)

The fast rollout of the 5G network will also mean that the telcos will have to set up infrastructure at a quicker pace than envisaged prior to the Jendela initiative. While Digital Nasional Bhd will own the spectrum, the cost of developing network towers and base stations will still have to be borne by the telcos.

The rollout of the 5G network is estimated to involve RM15 billion in infrastructure cost, which will ultimately be borne by the private sector, Minister of Finance Tengku Datuk Seri Zafrul Aziz said at the 16th Kuala Lumpur Islamic Finance Forum (KLIFF) 2021 on March 9.

As such, telcos will still have to contend with capital expenditure (capex) within a relatively short time to speed up the 5G rollout as well as migrate from 3G to 4G. Jendela envisages 4G coverage to reach 96.9% of populated areas by 2022, from 91.8% in 2020.

Jendela also aims to speed up fiberisation, to reach 7.5 million premises by end-2022, from the current 5.7 million premises.

Albern Murty, CEO of Digi.Com Bhd, will become the deputy CEO of Celcom Digi (Photo by Suhaimi Yusuf/The Edge)

For telcos with ambitions in convergence play — from home broadband and mobile network to enterprise broadband — this also means investing quickly in their fibre network, whether through their own fibre optic infrastructure, or piggybacking on that of other network owners.

All of these culminate in telcos needing stronger financial capabilities to meet the challenges. Hence Axiata and Telenor reviving their aborted merger plan, albeit at just the national level, rather than regional.

At the press conference to announce the latest merger plan, Axiata president and group CEO Datuk Izzaddin Idris said that it will help accelerate digitalisation in the country and create a large digital champion with substantial digital and financial capabilities.

He said that since the 2019 merger between Axiata and Telenor was aborted, Axiata has maintained that there is a need for consolidation in the telco industry in Malaysia, Indonesia and Sri Lanka.

He said the current merger proposal is to prepare Axiata, particularly Celcom, for what is to come later down the road. The merged company will be able to attract the attention of regional and global players, as well as the best talents to Axiata and Celcom Digi,  he said.

To recap, in May 2019, Telenor and Axiata announced that they were in talks to merge their Asian operations. The merger would have seen Telenor owning the bigger stake in the merged company with 56.5%, and Axiata the remaining 43.5%.

The merged entity would have had close to 300 million customers and become one of Asia’s largest mobile infrastructure companies, operating approximately 60,000 towers across Asia, according to Telenor.

However, the merger talks stumbled because of the complexities of cross-border mergers that involved different national authorities and shareholding structures. Nevertheless, Axiata and Telenor knew that was not the end of it.

According to a source familiar with the companies, the first merger failed because regulatory approvals were not forthcoming from the different countries that Axiata and Telenor have operations in.

Axiata is present in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia and Nepal, while Telenor has operations in Malaysia, Pakistan, Bangladesh, Thailand and Myanmar.

When announcing the merger between Celcom and Digi.Com, Izzaddin said it would not be anti-competitive in Malaysia, as it would not become a market-controlling entity.

However, there are countries in which both Axiata and Telenor have operations, and if the 2019 merger had materialised, the respective regulators would have raised anti-competitive questions.

Besides Malaysia, Bangladesh is the only other country that both Axiata and Telenor operate in.

Besides the complexity of cross-border mergers, there was also talk in August 2019 before the merger was officially called off that the bigger Telenor stake in the merged entity had been one of the contentious issues.

Some parties were concerned that the merger was akin to selling Axiata to a foreign entity. There was also talk that the headquarters of the merged entity would be in Singapore instead of Malaysia, and this was not palatable to the powers that be back then.

The current merger plan will see Axiata and Telenor holding a 33.1% stake each in Celcom Digi. The combined stake of Malaysian institutional investors, together with Axiata, will make up more than 51% of Celcom Digi.

While neither Izzaddin nor Telenor’s executive vice-president and head of Asia Jorgen Rostrup would publicly admit it, allowing the majority holding of Malaysian investors in Celcom Digi could be seen as an effort to appease the nationalists in the government and political sphere.

This is because Digi.Com is more profitable than Celcom, and as such, shareholders of the former should have a bigger stake post-merger. In 2020, Digi.Com’s earnings before interest, taxes, depreciation and amortisation (Ebitda) was RM3.1 billion, while Celcom’s was RM2.6 billion.

Digi.Com also had more mobile customers than Celcom in 2020, at 10.4 million, compared with 8.7 million for the latter. Combined, Celcom Digi will have 19 million customers in total across their two brands.

The brands will still be operating independently, which raises the question of whether there will be specialisation in terms of services or target markets for Celcom and Digi.Com. When asked about this, Izzaddin says the matter should be referred to the management of Celcom Digi later.

Izzaddin will be the chairman of Celcom Digi, while Rostrup will be the deputy chairman. Current Celcom CEO Idham Nawawi will be CEO of Celcom Digi while current Digi CEO Albern Murty will be deputy CEO.

This could also be seen as Axiata not relinquishing control over Celcom to a foreign entity — another way of appeasing the nationalists. However, the clash of cultures will be imminent in the merged entity, with it essentially having two leaders.

Nevertheless, Celcom and Digi.Com have been sharing infrastructure for many years. The experiences gained from working together all these years should be able to smoothen out any friction arising from differences in culture in both companies.

“The culture at Celcom and Digi are actually closer compared with other telcos in Malaysia — they both think alike,” says a source.

Sovereign fund Khazanah Nasional Bhd is the largest shareholder of Axiata, with a 36.8% stake.

“It would be easier to amalgamate the two cultures than that of Malaysia Airlines Bhd and AirAsia Group Bhd. That one, the culture is too different,” the source says.

On the question of culture, Axiata says that every merger will need to account for the complex integration of not just network systems and operations, but also two cultures.

“It is definitely a factor we are well aware of and both Axiata and Telenor know how important this is, have deliberated at length, and are fully aligned in ensuring this is executed well,” says Axiata.

Both Idham and Murty will be joining hands to bring the two teams together to create a unified culture, says Axiata. The nominations of chairman, deputy chairman, CEO and deputy CEO as announced also reflect one of many moves to address the integration of cultures, it says.

Prior to joining Axiata, Izzaddin was part of the UEM Group Bhd and had led UEM Sunrise Bhd in the merger with Sunrise Bhd, standing him in good stead to see the Celcom-Digi.Com merger through.

With a cleaner merger plan involving only Malaysian businesses, and the apparent greater control of Malaysian institutions in the merged entity, the parties appear to have learned from the first merger attempt — giving the latest proposal a better chance of succeeding.

Analysts postive on merger, shares of Axiata and Digi.Com surge

By Wong Ee Lin


Should the rekindled Celcom Axiata-Digi.Com merger plan be successful, telecommunications analysts see the deal as a “positive” as it reduces competitive market intensity and drives value creation from cost synergies.

This is evident just by looking at the share prices of both Axiata Group Bhd and Digi.Com Bhd, which soared by 8.16% and 18.93% respectively, just a day after news of the merger deal broke.

Digi.Com closed at an 11-month high of RM4.46 last Friday, valuing it at RM34.68 billion. Axiata settled at a 13-month high of RM4.11, giving it a market capitalisation of RM37.7 billion.

The recent surge in share prices has shrunk the upside to both the telcos’ target prices by analysts.

According to Bloomberg data, there are 22 research firms covering Axiata, with 14 “buy” calls, seven “hold” and only one “sell” recommendation. It has a consensus target price (TP) of RM4.22.

UOB Kay Hian, which has a “buy” call on Axiata, has the highest TP of RM4.70, implying 14.4% headroom to last Friday’s closing.

There are also 22 research firms covering Digi.Com. Seven have “buy” calls, 13 “hold” and two “sell” recommendations, with a consensus target price of RM4.09. Nomura, with a “neutral” call, has the highest TP of RM4.87, which means 9.2% upside.

“It is most timely, partly catalysed by government plans to roll out a single 5G network that will intensify retail price competition and crimp earnings further,” RHB Investment Bank Bhd analyst Jeffrey Tan writes in an April 9 report.

Together with local institutional investors, the MergeCo — to be named Celcom Digi Bhd — will be majority owned by local shareholders. Thus, the element of “local control” or national interests, seen to be central for the merger, will be realised, says Tan in the report.

Having said that, compared with the previous aborted merger that straddled nine markets, he sees a lower risk of regulatory impediments this time round.

TA Securities analyst Wilson Loo notes that major synergies between Axiata’s Celcom and Digi.Com arising from this merger include being able to share resources such as operating expenses, capital expenses, spectrum efficiencies and procurement.

Loo also opines that shareholders of MergeCo would stand to benefit from higher dividends in view of Axiata’s high dividend aspirations and Digi.Com’s historical dividend payout ratio of more than 90%.

However, between Axiata and Digi.Com, Loo notes that shareholders of Digi.Com appear to be the clearer beneficiaries of the proposed merger as the value accretion from synergies would be more direct.

“That said, for shareholders of Axiata, apart from the potential for value accretion and dividend upside via MergeCo, we view that they would also stand to benefit from the establishment of market valuation for its Malaysian operations via the MergeCo,” Loo wrote.

In fact, UOB Kay Hian Research analysts note that the MergeCo is set to become one of the top five largest companies on Bursa Malaysia by market capitalisation, with a potential value of over RM50 billion, based on the research firm’s preliminary estimates.

As at April 9, 2021, according to market capitalisation, Axiata was the 11th largest counter on Bursa, while Digi.Com was 17th largest.

“We believe MergeCo may have an upper hand in the longer run, given its leadership position, economies of scale, strong parentage (to provide global viewpoint) and sustained ability to grow over time (futureproofing the business model),” says UOB Kay Hian.

Nonetheless, while market consolidation may appear to benefit incumbents in the near term, the research house points out the threat of an efficient and hands-on telco giant looms in the longer run.

Potential earnings dilution risk seen for Axiata

“Assuming no synergies from the merger, we estimate that Digi.Com’s financial year ending Dec 31, 2022 (FY2022) EPS (earnings per share) will increase by 5% while Axiata will decrease by 10% as Digi.Com’s equity appears to be valued 67% above Celcom’s from the share and cash exchange,” says AmInvestment Bank analyst Alex Goh, who concurs that the merger deal looks better for Digi.Com.

Notwithstanding the potential EPS dilution, Goh notes that Axiata has maintained its FY2024 target to reach a net profit of RM1.8 billion and dividend per share (DPS) of 20 sen, partially from the expected synergies generated from the merger.

In FY2020, Axiata’s net profit stood at RM365.16 million, 75% lower from RM1.46 billion a year earlier, while revenue slipped 1.6% to RM24.2 billion, from RM24.58 billion.

He estimates that the MergeCo’s FY2022 net debt/Ebitda will rise from 1.0 times to 1.4 times, which remains comfortable for a telco business.

For Axiata, on the other hand, this will substantively drop from 1.1 times to 0.9 times due to the deconsolidation of Celcom’s debt and cash receipt of RM2 billion, Goh adds.

While concerns were raised, given the MergeCo’s enlarged subscriber base of 19.1 million customers, Kenanga Research analyst Lim Khai Xhiang highlights that as it is not in a position with an excessive amount of market share, he does not see any antitrust hurdles to the deal.

“MergeCo would have circa 40% of the market share among the mobile players, by considering the additional competitive threats that OTT (over-the-top) such as WhatsApp pose to MNOs’ (mobile network operators) traditional call and SMS revenue streams,” he explains.

Nonetheless, for Maxis, Lim says MergeCo’s leaner cost structure and thus “better” product pricing could spell potential downward pressure on product prices, potentially posing a threat to Maxis’.

“But we do not see this as an immediate threat yet, as executing on a leaner cost structure is likely to be realised over a longer term, mindful that right-sizing of workforce would need to be managed carefully,” he adds.

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