Shazalli’s appointment adds spice to merger prospects

THE appointment of Datuk Seri Shazalli Ramly certainly adds spice to speculation of a possible merger brewing between Telekom Malaysia Bhd (TM) and Axiata Group Bhd.

He takes over as the new chief of TM on May 1, succeeding Tan Sri Zamzamzairani Mohd Isa, who is retiring after nearly a decade at the helm.

Whether Shazalli is in favour or against the speculated merger is something that nobody really knows. But analysts generally are of the view that his appointment paves the way for the merger.

Shazalli is no newcomer to the world of telecommunications. He was head of Axiata’s unit Celcom Axiata Bhd for 11 years. During his time, Celcom reported 32 consecu- tive quarters of growth. However, in the past few years, the company that feasted on its successes is back to restructuring mode led by Michael Kuehner.

Zam leaves TM on a high note. The company reported its best-ever revenue in 2016 of RM12bil. The stock is among the top regional telecoms pick, with enterprise value/ earnings before interest, tax, depreciation and amortisation (EV/ EBITDA) at 7 time for 2016, lower than SingTel’s 12.1 times and Axiata’s 8.2 times.

What TM owns now is almost an essential utility – the high-speed broadband (HSBB).

Only a decade ago, it faced a bleak future as its fixed-line business was heading south and all its cellular units were taken out in a demerger exercise to create Axiata. The idea then was to expose investors to the cellular assets of the group as mobile phone then was vogue.

But soon after it landed in a partnership with the government to build the HSBB, TM’s fortunes changed.

Today, it is thriving and expanding its HSBB beyond major towns. But it needs to provide the mobile bit to be a converged player. Hence, it bought into Packet One in 2015.

Competition in the mobile field got intense a decade later. Now players need to exploit data to grow earnings since new growth in users has stagnated. They are forced to innovate or remain access providers where margins will thin over time.

TM has webe but to grow that from ground zero will take years. A merger with Axiata and Celcom pushes it to have access to over 10 million mobile users. Combined that with its own broadband users, it can drive TM’s ambitions to be a converged player. Hence, the merger talks surfaced.

With the merger, TM will be a bigger entity. However, that would create a monopoly and does not bode well for other cellular players that are also riding on TM’s fibre optic network to offer services.

TM holds the trump card to pricing and this may not be good for consumers, though the investing community may want exposure to a converged player. The mobile players cannot also fully rely on the other fibre optic player, Time dotCom Bhd, which has services in limited places.

So Shazalli’s job will be pretty cut out if there is a merger. It will be how he bundles the offerings to beat the rivals, provided after the merger he is still the head honco of the merged unit.

Should a merger happen, the other candidate that would be in the running for the post is his current boss, Axiata’s chief Tan Sri Jamaludin Ibrahim, who recently got his contract extended for another three years.

CIMB Research believes that TM’s financial year 2017 EV/EBITDA of 7 times is at parity to its three-year average with fair dividend yields of 3.4%. It expects the value accretion arising from the merger with Axiata to drive valuations closer towards SingTel’s 14 times.

But if the merger does not take place, Shazalli has to roll up his sleeves and push forth the cellular agenda.

It will be tough as the three players – Celcom, Digi.com Bhd and Maxis Bhd – will be fighting to keep their share of the market.

TM’s webe will have to come up with a better proposition and TM may have to build a big part of its network if it wants to be a serious player and that means additional cost over the next few years.

And while Shazalli is at webe, he better take a look at HyppTV. It needs to be a more meaningful player or it will remain second fiddle to Astro.

These are serious decisions he has to make and he has to do it fast because the momentum lost is not to TM’s gain. The good thing is he has Datuk Bazlan Osman as his deputy. Bazlan has built up a career by holding the purse strings of TM.

He will be an asset to ensure there is no excessive and unnecessary spending in TM in its quest to become a converged player.