KUALA LUMPUR (July 18): Maxis Bhd (KL:MAXIS), Malaysia’s second-biggest mobile network operator, likely explored buying U Mobile in a bid to narrow the gap with its largest rival even as chances of a deal are low due to financial and regulatory hurdles, analysts said.

The purported acquisition of U Mobile would turn Malaysia's mobile market into a near-duopoly with a combined entity holding a 46% share, according to Bloomberg Intelligence. Further, the hefty valuation would also require Maxis to turn to debt, possibly stretching finance costs by at least 35%, it noted.

That would leave Maxis “limited firepower” to fund Malaysia's potential second 5G network that it is a part of, the research arm of Bloomberg warned.

Maxis declined to comment on the Bloomberg News report.

On Tuesday, Bloomberg News reported that Maxis was considering buying out U Mobile Sdn Bhd, with U Mobile rejecting the buyout offer. Further, shareholders of U Mobile asked for a valuation of more than RM10 billion, according to the report.

Malaysia's telecom sector is dominated by CelcomDigi Bhd (KL:CDB), commanding 47% of total mobile subscription. Maxis and the unlisted U Mobile — controlled by Malaysian gaming tycoon Tan Sri Vincent Tan — jostle with other smaller players for the remaining market share.

The industry is now facing pressure to upgrade its equipment in anticipation of the rollout of the 5G network. The massive capital outlay required to handle the surge in data traffic, however, has been eroding profit margins, and U Mobile had earlier sparked a price war with aggressive discounting.

“The significant financial resources directed towards the acquisition would strain cash flow and limit the funds available for crucial 5G infrastructure investments,” said AmInvestment Bank. “This could delay Maxis' 5G development and its competitive positioning in the market.”

U Mobile is planning to file for an initial public offering (IPO) at the end of July, Bloomberg News reported.

An IPO of a telecom company could attract investors due to strong cash flow generation and potential dividends, said an analyst with a local brokerage. Further, the IPO would be timely as U Mobile also requires funds for 5G-related expenditure, the analyst said.

On Dec 1, 2023, five mobile network operators — CelcomDigi Bhd, Maxis Bhd, Telekom Malaysia Bhd, U Mobile Sdn Bhd and YTL Communications Sdn Bhd — signed the agreement to take up stakes in DNB as part of the transition from single wholesale network to a dual network model.

Under the share sale agreement, the five mobile network operators will collectively subscribe to 70% equity in DNB, with each holding a 14% stake, leaving the Ministry of Finance Inc with 30% equity and a special share that will grant it certain special rights for a stipulated period.