KUALA LUMPUR (May 17): The credit impact of a potential merger Axiata Group Bhd (KL:AXIATA) is considering in Indonesia hinges on the deal structure, according to S&P Global Ratings.
In a statement on Friday, the rating agency said a key factor would be the extent of control over the cash flow of the merged entity.
On Wednesday, Axiata (BBB/stable) announced that it had entered a non-binding memorandum of understanding to mutually explore a merger between its mobile subsidiary in Indonesia — PT XL Axiata Tbk — and PT Smartfren Telecom Tbk.
S&P said the credit implications of the potential merger hinge on a few key factors:
- The shareholding structure, and Axiata's extent of control, of the merged entity (MergeCo);
- The dividend policy of the MergeCo; and
- The post-transaction leverage of Axiata.
S&P said Axiata's earnings quality could weaken if it loses direct control of XL Axiata's earnings and cash flow.
The rating agency said that is because a greater proportion of Axiata's consolidated cash flow will then come from higher-risk markets, mainly Bangladesh, Sri Lanka, and Cambodia.
XL Axiata is the largest contributor of Axiata's earnings before interest, taxes, depreciation and amortisation (Ebitda), contributing about half of the group's adjusted Ebitda in 2023.
S&P said given that Axiata and Smartfren's parent, Indonesia-based conglomerate Sinar Mas Group, intend to be joint controlling shareholders of the MergeCo, Axiata's effective ownership of the combined Indonesian operations could decline from the current 66.5% of XL Axiata.
“If the merger were to go ahead, it would bolster the competitive position of the combined entity.
“We estimate that the MergeCo would have about 94 million mobile subscribers in Indonesia, making it the third largest player [there], just behind PT Indosat Tbk, with 101 million mobile subscribers,” it said.
S&P said this compares with the current 58 million mobile subscribers to XL Axiata alone.
It said competition in Indonesia's mobile segment could ease further, as the number of key players reduces to three from four.
The rating agency said the merger will likely result in some synergistic cost savings for the MergeCo.
It said the entity's enlarged mobile market share would also support Axiata's strategic initiative in expanding its fibre, tower, and digital businesses in Indonesia.
At the time of writing on Friday, Axiata had added 0.35% or one sen to RM2.85 on Bursa Malaysia, with 722,800 shares traded.