XL set to consolidate position as leading Indonesian telco
THE proposed acquisition of PT Axis Telekom Indonesia (Axis) by Axiata Group Bhd’s subsidiary, PT XL Axiata Tbk (XL), in Indonesia will catapult the group into its next phase of growth in the highly-populated country.
XL will be able to reinforce its position as a leading operator in the Indonesian telecommunications industry with the acquisition. The Indonesian subsidiary is currently the second largest telco in market revenue and market capitalisation in the country.
Most of all XL will be able to gain access to additional spectrum from the acquisition and save some US$250mil on spectrum acquisition cost. The acquisition will also provide XL immediately with an enlarged subscriber base.
On Thursday, Axiata announced that XL had entered into a conditional sale and purchase agreement with Saudi Telecom Company and its unit Teleglobal Investments BV to buy a 95% stake in Axis. Axis is valued at a 100% enterprise value of US$865mil (RM2.8bil) on a cash free and debt free basis.
Axiata says the acquisition would allow Axiata to reach over 65 million customers at the same time to boost its expansion plans.
When contacted, Axiata says the proposed acquisition is expected to be completed latest by March 31, 2014 barring any unforeseen circumstances and subject to all approvals being obtained.
“The transaction completion is subject to XL retaining Axis’ spectrum. We are confident and hopeful that we will be able to keep the entire spectrum.
The Communication and Information Technology Ministry has given its in-principle approval for the transaction subject to further evaluation of the transaction. We will continue to work with the authorities on all necessary requirements to obtain final approvals,” Axiata tells StarBizWeek.
In addition, Axiata says at present, Axis and XL are separate legal entities with any potential future merger being subject to regulatory approvals.
On financing the acquisition, Axiata says it would “funded via internally generated funds of XL, borrowings and a shareholder loan from Axiata”.
Commenting on the benefits of the deal, Axiata expects significant capital expenditure (capex) and operating expenditure (opex) spend efficiency. It estimate 50%-60% savings for incremental capex and opex spend.
“We will also save from avoiding cell splitting.
This will drive immediate 2G capex and opex savings of US$200mil, medium term savings on 3G of US$200mil and longer term savings on LTE of US$400mil.
“The acquisition could also see a potential saving of US$250mil or more for any upcoming spectrum auction XL would have participated in given its spectrum requirements,” Axiata says.
Axiata president and group chief executive officer Datuk Seri Jamaludin Ibrahim says as the majority shareholder of XL, Axiata strongly supports the transaction.
“We are a long-term investor and the acquisition is in line with our strategy of continued investment in every country we operate in and supporting in-market consolidation where it benefits all parties.
“We are confident we can successfully execute the integration as we did with Hello and Smart in Cambodia as well as Suntel and Dialog in Sri Lanka. Both acquisitions saw smooth integration both strategically and financially,” he says.
RHB Research views the proposed acquisition as “positive” in the longer term and does not expect Axiata’s earnings dilution to be too significant. It maintains that Axiata’s ability to progressively pay more dividends remains intact.
According to analysts, XL is leading the Indonesian telco industry consolidation by acquiring Axis. They believe the acquisition will provide a positive impact on all financial metrics in the mid-term for XL and Axiata as the parent company.
A local bank backed analyst points out that the 1,600 Axis-owned towers are worth more than US$200mil. He says XL will be able to save on towers assets, spectrum and network equipment that could be reused with the acquisition of Axis. “Spectrum, a prized asset, is key for XL to compete and expand.”
The analyst also points out that the beauty of the deal is that Axiata will get to walk away from deal if they do not the approval from the regulator from Indonesia to retain the spectrum held by Axis.
Analysts say XL is interested in the 15Mhz spectrum block in the 1.8Ghz band which may be utilised for Indonesia’s impending rollout of 4G services.
“We note that XL has significantly less 1.8Ghz spectrum (7.5Mhz) versus competitor Telkomsel (22.5Mhz) and Indosat (20Mhz). Therefore, consolidation of Axis and XL’s 1.8Ghz spectrum to form a more substantial 22.5Mhz block will enable XL to compete on a level footing with its peers,” TA Securities says.
AmResearch says the acquisition will double XL’s current spectrum and positions XL at par to leader Telkomsel. “The increased spectrum will result in capex savings of US$200mil in FY14 forecast (for 2G capex) and a further US$600mil in capex savings (for 3G and data capex) in the mid-to-longer term.”
In addition, the research house says the enlarged spectrum in the 1.8Ghz band positions XL strategically for future LTE rollout. The deal also reinforces XL’s position as the second largest player with a revenue share of 19% to 21%.