Synergies significant, but hurdles ahead for telco merger
The muchanticipated merger between Axiata Group Bhd (Axiata) and Norway-based Telenor Group will create a merged telco giant with better synergistic value, but analysts forewarn of a tough road towards this union with regulatory and forex risks in mind.
The merger will allow Axiata to tap in to the expertise of Telenor, a global telecom operator, with more than 20 years in Asia and proven track record of delivering cost and efficiency agenda.
Furthermore, the merged entity will have better bargaining power in terms of purchasing telecommunication equipments.
Public Investment Bank Bhd (PublicInvest Research) in its notes anticipated cost synergies amounting to RM20 billion from the merger.
“Revenue synergies are expected to be limited but cost synergies would be substantial through consolidation of assets, economies of scale and complementary best practices,” it said yesterday.
“The key overlapping market is Malaysia and hence, the merger would create benefits through capex savings, capacity gains from higher bandwidth and efficiency as well as optimization of network and operating expenses.”
The merger should also create additional value in procurement as the enlarged entity would have greater bargaining power in setting pricing terms for mobile and tower equipment, it added.
Other area of cost synergies includes improved tenancy and operational efficiency for the tower business.
“At this juncture, it is still premature to assess the changes to shareholding structure of DiGi due to the absence of key information but we understand that its listing status will be maintained.
DiGi is expected to acquire Celcom to create the largest mobile operator in Malaysia in a non-cash transaction.
Likewise, Axiata will remain listed with Robi (Bangladesh), Axiata Digital and Idea (India) held outside the merged entity.
The merged entity, however, will be an unlisted arm though there are plans for a public offering within the next few years. In our opinion, DiGi and Axiata should ultimately be privatized once the merged entity is listed
Kenanga Investment Bank Bhd (Kenanga Research) was positive on the initiatives, although the preliminary discussion has no certainty that it will result in any transactional agreements between both parties.
Senior analyst Cheow Ming Liang said with limited available information, it was hard to gauge any valuations for the proposed transaction and the merged company (MergedCo).
“While we feel excited on the above potential operational synergies, there are several hurdles/challenges that need to be addressed,” he highlighted in his report.
“Tops of the lists are the regulatory approvals given the MergedCo is involved in the nine different countries, and thus, subject to different policies and guidelines.
“Besides, spectrums would be another major concern, especially in Malaysia, as the local authority may be reluctant to award similar spectrums to the same entity.
“Shareholders’ approvals, meanwhile, may be another hurdle, especially when the valuation is not appealing enough but still requires consents from the shareholders.
“Lastly, organisational and culture changes could be another challenge in view of both entities having different cultures, which may lead to culture clash.” MIDF Amanah Investment Bank Bhd (MIDF Research) also warned that the move might trigger regulatory risk, in the case of Malaysia, as well as higher exposure to forex translation risk.
“Also, we view that the group has to iron out the issue surrounding Ncell which could potentially affect Axiata’s standing in the new merged entity. At this juncture, we are maintaining our neutralL recommendation on Axiata pending finalisation of the development.” AmInvestment Bank Bhd (AmInvestment Bank) was also uncertain if the Malaysian Communications and Multimedia Commission and current political regime would approve this proposal given that a merger would reduce the level of competition at the expense of consumers’ choice and pricing alternatives.
“We reiterate our view that such an extensive restructuring exercise could be hindered by the respective country’s regulatory oversight.”