Axiata-Telenor merger in jeopardy?

Sources say there are too many issues to be ironed out

THE proposed merger between Axiata Group Bhd and Norway’s Telenor ASA, that would have created a regional telecoms giant, may have hit a snag.

Sources say there are too many issues that need to be ironed out given the complexity of the merger, but at this point of time it “seems difficult to get positive variations for a win-win for both parties.”

“There are lots of clauses and terms that need to be met for the merger to be a winwin. These terms seem to be favouring Telenor and that could be a sticky issue,’’ says a source.

One of the biggest hurdles that may jeopardise the merger is the push towards moving the domicile of the merged company (mergedco) out of Malaysia, possibly to Singapore. That is not going down well with some parties.

“Moving the mergedco out of Malaysia would simply mean that the mergedco will no longer be a Malaysian-based telecoms company. It would also mean Malaysia will not get most of the taxes from the mergedco as it will no longer be a Malaysian registered company,’’ says the source.

Axiata and Telenor had in May announced plans to merge their telecoms and infrastructure assets in Asia to create a Pan Asian telecoms company.

Telenor is supposed to hold 56.6% in the mergedco and Axiata 43.5% and this equation was based on the value of assets of the company at that point. It is not clear if Axiata’s stake has been reduced or raised now that the due diligence is almost 90% complete.

The mergedco is to hold stakes in all the units across Asia that both Axiata and Telenor have. A dual listing is also planned for the mergedco, in Malaysia and another country to be decided later.

The merger also involves the Malaysian units of the two giants, namely Celcom Axiata Bhd and Digi.Com Bhd. This would create the biggest local mobile company (MalaysiaCo) ahead of rival Maxis Bhd.

Based on their earlier announcement, the mergedco will have an annual proforma revenue of more than RM50bil, earnings before interest, taxes, depreciation and amortisation of about RM20bil and a net profit of RM4bil. The merger is expected to cut redundancies and generate cost savings or “synergies’’ of about US$5bil annually.

The source added that “there is also dispute over board seats and who will be the CEO of the mergedco.

“There should be fair representation of board seats and both parties should decide on the CEO, not just one party having the upper hand,’’ he adds.

Another source adds that “there are talks that even at the MalaysiaCo level, they are trying to push for a foreign CEO even though the May announcement states it should be a local candidate.

When contacted, Axiata declined comment. Among the many things that Axiata has to ensure is that there will be “no retrenchment of staff at Axiata and Celcom level. In addition the vendor support development programme and bumiputra empowerment programs have to be maintained, but by the look of things, it does not seem to be moving smoothly in that direction.’’

However, another source is more sanguine about the prospects of the merger.

“The due diligence is still progressing and many issues have been agreed upon. Obviously, given the magnitude and complexity of the deal involving many entities across many countries, there is still work to be done.’’ However, it is understood that many of the employees at both Axiata and its unit, Celcom Axiata Bhd, have raised concerns about losing their jobs at a time of slowing economic growth.

Yet another challenge is related to Indonesia, where Axiata has a big presence.

Axiata has 66.4% stake in PT XL Axiata Tbk, which is the second largest mobile company in Indonesia.

Industry sources tell StarBizWeek that Telenor has for long been wanting to be part of the growth story in Indonesia but has not been able to conclude a successful deal there. By merging with Axiata, it would gain access into Southeast Asia’s most populous nation.

Notably, the Indonesia’s Minister of Communication and Information Technology Rudiantara recently said that his ministry will conduct a review on the proposed merger between the two parties.

He said the review was necessary because Telenor originated from the European Union (EU) whose parliament had on June 10 passed laws to restrict and ban palm oil usage in biofuel by 2030.

“I cannot ignore the issue (on palm oil ban),” Rudiantara was reported to have said recently in a media report.

He added that the Indonesian government’s attitude towards the merger is not known yet. Whatever the issues, once the due diligence is completed and the parties have agreed to all the terms, taking into account the national and staff interest, they will then have to present their case to the powers that be for approval. Only then can they sign the definitive agreements.

The due diligence is expected to be completed within the next couple of weeks and the plan is to have a definitive signing in September.