Proposes to Acquire Airtel Lanka Via a Share Swap

Axiata Group Berhad's Sri Lanka subsidiary Dialog has entered into a definitive agreement to acquire the entire issued shares of Airtel Lanka (Airtel), a wholly owned subsidiary of Bharti Airtel. The purchase consideration is satisfied via the issuance of 952.7mn or 10.4% of new Dialog shares to Bharti Airtel.

Airtel is principally involved in digital mobile services in Sri Lanka, which include voice, data, and enterprise solutions.

The proposed acquisition is subject to the approval of Dialog's shareholders and is pending the completion of specific conditions outlined in the agreement. The final acquisition price will be determined in accordance with a 90-day volume-weighted average price at the completion date once all the relevant conditions are met.

Our View

We are not surprised by this news, given that the group had previously entered into a binding term sheet to combine the operations of Airtel Lanka with Dialog in Sri Lanka. Based on our back-of-the-envelope calculation, the 10.4% of new Dialog shares should translate to purchase consideration of about RM156.4mn, implying a Price-to-Sales multiple of around 0.8x, which appears to be reasonable, considering that the peers such as Dialog and Sri Lanka Telecom are trading at around 0.5x and 1.5x, respectively.

Overall, we are neutral on the proposed acquisition. The acquisition will likely create synergistic benefits, which include i) reducing the duplication of infrastructure, ii) better cost efficiency via opex savings from business integration, and iii) strengthening distribution channels. On top of that, it will facilitate better spectrum efficiency and CAPEX synergies to improve service quality. Meanwhile, the proposed merger will also help to reduce the competitive pressures within Sri Lanka's telco space. Dialog is the largest telecom service provider in Sri Lanka, with more than 17mn subscribers, while Airtel has around 5mn subscribers.

Nevertheless, we see some potential earnings risk to Dialog, given that Airtel is still in loss-making mode. For FY23, Airtel recorded a net loss of around RM245.4mn. Therefore, Dialog will be subject to earnings volatility if Airtel's earnings performance falls short of expectations.

Forecast

No change to our FY24-FY26 earnings projections at this juncture, pending the shareholder of Dialog and regulators' approval for the proposed transaction.

Valuation

Maintain our Sell recommendation on Axiata with an unchanged TP of RM2.35 based on SOTP valuation. Key downside risks include heightened competition, macroeconomic headwinds, and regulatory uncertainties.

Source: TA Research - 19 Apr 2024