KUALA LUMPUR (May 16): Axiata Group Bhd’s (KL:AXIATA) move to merge its Indonesian telco unit XL Axiata with Smartfren Telecom will yield consolidation benefits, analysts said, but questioned the expected synergies from the deal.
Axiata needs to clarify the rationale and potential synergies behind the proposed merger, particularly in light of Smartfren's smaller scale while its average revenue per user is among the market’s lowest, RHB Investment Bank (RHB IB) said in a note to clients.
“While we acknowledge the deal’s strategic intent, we believe the key focus should be establishing a strong transaction rationale,” RHB IB said. “Investor concerns are likely to be on the potential merger synergies.”
Axiata through its 66%-owned XL Axiata signed a non-binding agreement with conglomerate PT Sinar Mas Group on Wednesday for a merger with its telco unit Smartfren Telecom.
The proposed transaction is still at an early stage of evaluation, with Axiata and Sinar Mas intending to remain as joint-controlling shareholders of the merged entity.
Combined, XL Axiata and Smartfren would own 34% of the overall spectrum in Indonesia, narrowing the gap with larger rivals Telkomsel and Indosat, which collectively hold 66% of assigned spectrum rights.
The enlarged spectrum holdings will allow the merged entity to “compete more effectively against peers”, said Kenanga Investment Bank. However, the research house flagged the possibility that the merged entity may need to partially surrender its spectrum holdings back to the Indonesian regulator.
AmInvestment Bank, meanwhile, said the merger would allow XL Axiata to achieve economies of scale from streamlined processes and optimised capital expenditure, reducing operating costs by eliminating duplicate sites and sharing marketing or administration resources.
However, the research house warned of risks that XL Axiata’s gearing may increase post-merger, as Smartfren’s net debt was higher at 12.3 trillion rupiah (RM3.4 billion) for the financial year of 2023, it said.
Further, when measured against cash flow, Smarfren’s net debt was also relatively high at 4.9 times versus XL Axiata’s 2.5 times, according to the research house.
“In the near term, we are cautious on Axiata’s prospects due to network integration risk, regulatory risk, and foreign exchange risk,” it added.
Axiata, controlled by sovereign wealth fund Khazanah Nasional Bhd, has been shedding assets and acquiring new ones as part of an effort to boost its profitability. The company announced the sale of its businesses in Myanmar in April this year and Nepal in December last year.
Shares of Axiata jumped to a one-year high of RM2.91 on May 7. The counter closed at RM2.84 on Thursday — up one sen or 0.35% — valuing the company at RM26.08 billion.
On a year-to-date basis, it has risen over 18%.