This article first appeared in The Edge Malaysia Weekly on June 26, 2023 - July 2, 2023

EDOTCO Group Sdn Bhd, the world’s sixth-largest telecommunications tower company, is hungry for fresh capital to grow, as this type of business typically requires heavy capital expenditure even without any mergers and acquisitions to expand its footprint in the region. Simply put, it needs capex to build more telco towers in catering for rising demand as countries race to roll out 5G infrastructure.

edotco has been told by its controlling shareholder, Axiata Group Bhd, however, that it will not loosen its purse strings to pump in additional funds for its hefty capex.

“We [Axiata] are not putting any new capital into edotco; they need to get new investors or go to the bank to borrow money,” says Axiata group CEO and managing director Vivek Sood, admitting that this is likely to constrain edotco’s growth path.

Vivek, an accountant by training, tells The Edge that Axiata is preparing for a dilution if new shareholders emerge.

He says such a strategy is necessary to keep Axiata’s debt-to-Ebitda (earnings before interest, taxes, depreciation and amortisation) from rising too far above current levels — at three times currently — while still being able to deliver returns to shareholders.

The telco’s high gearing ratio has been a cause for concern. Interest expenses are eating into its earnings.

Indeed, edotco has already raised fresh funds without its parent’s help in the past few years.

Instead of a listing exercise, edotco did a private placement to Japan’s INCJ Ltd and Kumpulan Wang Persaraan (Diperbadankan) (KWAP) to raise US$500 million in 2017. At the same time, Axiata also sold a 10.57% stake to Mount Bintang Ventures Sdn Bhd, a unit of its parent company Khazanah Nasional Bhd.

Interestingly, the management then emphasised that Axiata managed to retain majority control of the tower firm. Axiata now holds 63% in edotco; INCJ owns 21.14%, followed by Khazanah with 10.57%, and KWAP, 5.29%.

Vivek notes that the primary criterion for Axiata is a compelling valuation that justifies the divestment of its majority stake in edotco, which could form part of the group’s efforts to monetise assets, which include digital businesses and exposure to frontier markets such as Nepal and Sri Lanka.

By divesting assets at attractive valuations, Vivek says, Axiata will be able to ensure that its shareholders’ interests are optimally served in any potential transaction.

In addition, edotco has also borrowed more to meet its funding needs. Last September, edotco issued its maiden RM1.4 billion sukuk under its newly established Islamic medium-term notes programme of up to RM3 billion.

Earlier this month, the tower company’s subsidiary edotco Investments (Labuan) Ltd took a syndicated term facility for funding of up to US$700 million (RM3.27 billion), primarily to fund its recent acquisition of 2,973 towers in the Philippines through a sale and leaseback transaction with PLDT Inc.

OCBC Bank was the lead coordinator and facility agent, while DBS Bank Ltd and MUFG Bank Ltd Labuan Branch also participated in the syndication as mandated lead arrangers for the facility.

Reducing Axiata’s debt level is crucial at this point in time. Nonetheless, some quarters say the opportunity cost of not investing more in edotco, a company that has great potential, is high.

In a nutshell, Axiata will have a shrinking share of a growing pie that could have been a major future earnings contributor, if it has a strong balance sheet. After all, Axiata is not an investment portfolio manager.

Vivek, who joined Axiata six years ago, disagrees. He tells The Edge in an interview: “Three years back, who would have thought we would give up [a controlling stake in] Celcom Axiata Bhd? Control used to be phenomenal, but if [paring its stake] can create greater value, a greater partnership, why not?

“Now, the market as such, as you look at it, what is the first thing for us to look at? In my view, who can do a better job to create value in the company?”

The tower company has been delivering top- and bottom-line growth over the past few years even with disruptions due to the pandemic.

A filing with the Companies Commission Malaysia shows that edotco recorded a profit after tax of RM292.69 million for the financial year ended Dec 31, 2021 (FY2021), up 26% from RM232.04 million in FY2019, while revenue grew 9.4% to RM1.98 billion from RM1.81 billion in the same period.

Edotco’s listing has long been talked about, but Vivek does not think the current rising interest rate environment is conducive for an infrastructure player to undertake an initial public offering.

“We are ready to go for an IPO now, the scale is large enough to attract anyone, [but] I think for us the timing is not right because of the high interest rate at this point in time. Infrastructure has lost a little bit of its charm,” he says.

Moreover, Vivek says there are still options available for edotco to raise funds via strategic investor and bond issuances.

“The second objective of an IPO will be monetisation of existing shareholders, which I don’t think is that much of a hurry for us.

“The third thing is you basically make it more public for others to participate in the value creation. Well, I think the public can still wait two to three years, when the market is more appropriate for an IPO,” he says.

Of its portfolio of 58,364 towers, edotco owns 33,221 and manages 25,143.

Apart from Malaysia and the Philippines, the company also has a presence in Indonesia, Bangladesh, Myanmar, Cambodia, Sri Lanka, Pakistan and Laos. 

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