- It was reported in local dailies today that the Indonesian Government has indicated that it will give formal approval to Axiata to own a stake in PT Axis Telekom Indonesia (Axis) later this year. In late July 2013, it was reported that XL has already received the Communications and Information Ministry’s initial approval for the acquisition of Axis.

- As a recap, XL (Indonesia’s 3rd largest telco, 67% unit of Axiata) has been looking to put in a bid to acquire Saudi Telco’s 84% stake in Axis. Based on news reports that surfaced in May, Axis was valued at an EV of USD1bil (RM3.2bil).

- Axis launched services in 2008 providing 2G and 3G services. Axis is 84% owned by Saudi Telecom Company and the remainder is held by Maxis Communications Berhad. The group has >70% population coverage in Indonesia and 17mil subs (vs. XL’s 49.1mil), or a 6% estimated share of the Indonesian market.

- A potential acquisition may bring a few key positives: (1) Elimination of competition might allow price stabilisation and improve competitive dynamics; (2) Cost reduction given consolidation of infra – Axis has 10K 2G and 3G sites (vs. XL’s 39,819 sites); (3) Potential 35% expansion in subs to 66mil, potentially positioning the merged group as the 2nd largest player in Indonesia – currently, the two largest players are Telkomsel (125mil subs) and Indosat (55mil subs); (4) Acquisition of additional spectrum, which could reduce capex by 40%-50% - Axis currently owns a 10MHz block in the 2.1 Ghz (3G) spectrum, while XL has 15MHz.

- During XL’s results teleconference, management was still tight lipped on pricing of a potential acquisition, but indicated that both parties have been looking at it seriously for quite some time and are in the midst of working out “solutions” in valuation vs. components in Axis that comes with a potential acquisition. One major regulatory hurdle is that XL may not get to acquire all of Axis’ 10MHz block. It is said that for the acquisition (including spectrum) to go through, XL itself needs to return a 5MHz block in the 2.1GHz spectrum (recently won though a beauty contest along with Telkomsel).

- Maintain BUY on Axiata at unchanged FV of RM7.30/share. Depending on valuations, a potential acquisition could provide upside to our current valuations. As a rough gauge – assuming an IRR of 15% for a RM3bil consideration, we estimate that an acquisition could enhance our FV by 3.5% (or c.25sen/share).

Source: AmeSecurities