- We maintain our BUY call on Axiata at a higher FV of RM7.40/share (from RM7.30/share previously). XL has entered into a conditional sale & purchase agreement to acquire 95% of Axis at 100% EV (free of cash and debt) valuation of USD865mil. Bulk of the consideration is to settle outstanding debts at Axis (with the rest of Axis’ debts to be settled by existing shareholders prior to completion of the deal). The deal is expected to be completed by the end of the year or latest by end-1Q14.

- Axis is loss-making currently and the deal is earnings dilutive in the short term. Axiata is targeting EBITDA to breakeven in one year and net earnings to breakeven in 2 years. No specific financial details on Axis are available at this juncture. The deal is still subject to final approval by regulatory bodies.

- The main benefit of the acquisition is that it almost doubles XL’s current spectrum (the deal is subject to spectrum retention) and positions XL at par to leader Telkomsel (with Axis having 10MHz more spectrum in the 2100Mhz frequency) (See Table 1).

- The increased spectrum will result in capex savings of USD200mil in FY14F (for 2G capex) and a further USD600mil in capex savings (for 3G and data capex) in the mid-to-longer term. The enlarged spectrum in the 1800MHz band positions XL strategically for future LTE rollout. The deal also reinforces XL’s position as the 2nd largest player with a revenue share of 19% to 21%.

- In terms of impact to projections at the XL level, we estimate a 1.1% dilution to XL’s FY14F EBITDA, 20% to EBIT due to increased depreciation and 35% dilution to bottomline (mainly due to increased interest cost on new loans).

- At the Axiata level, the dilution impact on EBITDA is <1%, 4.5% to EBIT (due to higher depreciation), and 1.4% at net profit level. This is mainly due to the fact that:- (1) part of the funds to pay for the acquisition will be extended as shareholder loan from Axiata, which means Axiata will not get as badly hit from interest cost; and (2) lower minority interest charge given earnings dilution at XL post-Axis acquisition.

- After imputing capex savings of c. IDR2tril in FY14F and assuming lower capex intensity in FY15F and beyond (assuming the earnings dilution impact is neutralised from FY15F), we estimate that the deal would be marginally positive (+10sen/share) to our sum-of-parts based valuation for Axiata. Potential upside catalyst going forward is how quickly management can integrate and turnaround the merged entity.

Source: AmeSecurities