MERGER EXPECTED TO MATERIALISE
Affin Hwang says key terms on proposed Celcom Digi agreed upon, unlike in 2019
WILL the proposed merger of Axiata Group Bhd and Telenor ASA’s mobile operations in Malaysia succeed this time? What will the value of the merged company be?
These were some of the questions that surfaced as Digi.Com Bhd shares surged on Friday, a day after Axiata and the Norwegian telco giant announced they would make another go at merging their mobile operations.
Analysts said unlike the failed attempt to merge Axiata and Telenor’s Asian operations in 2019, there is greater likelihood that the latest planned merger, albeit on a reduced scale, will go through.
Axiata and Telenor last Thursday said they were in advanced discussions on the merger of the telco operations of Celcom Axiata Bhd and Digi.
Celcom Axiata is a wholly owned subsidiary of Axiata, while Digi is 49 per cent-owned by Telenor.
Affin Hwang Capital sees a high likelihood of this merger materialising considering that the key terms have been agreed upon and it is of a smaller scale and less complex.
It said both parties have also gained experience from their previous attempt and are better prepared, adding that they have a similar preference for high dividend payout.
Kenanga Research said compared to the 2019 attempt, there is greater incentive for Axiata and Telenor to merge their operations this time given the special-purpose vehicle ownership via Digital
Nasional Bhd’s deployment of the 5G spectrum.
There are also no cross-border complications and the groups have agreed on a shareholder structure, unlike in 2019 when the deal fell apart partially because of a disagreement in the equity stake, the firm added.
“That said, we believe a potential deal breaker could be the lack of synergies, as initially expected,” it said.
Affin Hwang valued the proposed merged company, to be known as Celcom Digi Bhd, at RM53.6 billion.
This is based on a target 2021 enterprise value versus earnings before interest, taxation, depreciation and amortisation (EV/Ebitda) of 12 times, which is below Digi’s nine-year average EV/Ebitda to reflect the current business conditions and assuming no synergy from the merger.
The merger values Digi’s share at 11.7 times Affin Hwang’s 2021 EV/Ebitda, which is set at a premium to Axiata’s nine times 2021
EV/Ebitda.
In their announcement last Thursday, Axiata and Telenor said they would have equal ownership estimated at 33.1 per cent each in the merged entity.
Axiata will receive newly issued shares in Digi representing 33.1 per cent post-transaction shareholding and cash equalisation of around RM2 billion, RM1.7 billion of which is to come from Digi as new debt and the balance from Telenor.
Celcom Digi will continue to be listed on Bursa Malaysia.
Despite its optimism, Affin Hwang said securing regulatory approval could be a hurdle.
“The merged entity would have a 44 per cent share of Malaysia’s cellular market and hence, securing regulatory approval could be a hurdle.
“Nonetheless, both managements from Axiata and Telenor have argued that if we were to include the fixed line/fixed broadband providers and the OTT (over-the-top) players (i.e.
WhatsApp, Skype), Celcom Digi’s market share in the telecommunication space is not dominant, with which we concur.”
Meanwhile, Kenanga Research does not think there will be an antitrust hurdle.
“By considering the additional competitive threats that OTTs pose to mobile operators’ traditional call and SMS revenue streams, (Celcom Digi) is not in a position with an excessive amount of market share. Thus, we do not believe that there will be any antitrust hurdles to the deal.”
The firm believes Celcom Digi’s leaner cost structure and thus “better ” product pricing could spell potential downward pressure on product prices, potentially posing a threat to Maxis Bhd.
“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,” it added.