Highlights

Announced the much anticipated acquisition of Axis from Saudi Telecom Company and Teleglobal Investments B.V. for a cash consideration of USD100 and procure the repayment of ~USD865m of Axis’ indebtedness.

The consideration represents Axis’ enterprise value, on a cash free and debt free basis, and has been primarily derived by valuing the potential benefits and synergies that XL expects to extract. This can be broken down into Axis’ assets (1,600+ towers and infra) of USD280m, 2G savings of USD200m, data savings of USD600m, spectrum book value of USD250m, subscriber base and LTE opportunity.

It will be funded via internally generated funds of XL, borrowings and a shareholder loan from Axiata.

XL will hold 95% of Axis while remaining 5% will be held by a local shareholder, to comply with Indonesian regulations.

The acquisition is solely with the objective to expand airwave war chest in both 1.8GHz and 2.1GHz spectrums. This will grant XL with more capacity in both 2G and 3G as well as greater quality of service.

In FY12, Axis’ 14.6m subscriber base generated revenue of RM704m but this was translated into a net loss of RM1.5bn.

Transaction is expected to complete within 3-4 months.

Financial Impact

Leverage will increase by <2x with a strong deleveraging profile, comfortably within covenants and rating triggers.

Short term negative EBITDA impact mitigated by quantifiable business benefits and accelerated integration.

Expects to be EPS accretive in the medium term.

XL dividend policy remains unchanged.

Comments

We are very positive on this deal as the price was lowerthan- expected, free of debts and bundled with 2G airwaves.

This marriage is complementary and synergistic due to economy of scale, OPEX and CAPEX savings, minimum overlapping coverage and technologically compatible.

Axis has an accumulated losses tax credit which amounted to USD1bn with expiry within 3-5 years, but was not taken into account in valuation due to prudency.

Low regulatory risk as Communication and Information Minister has approved the merger in principal.

Catalysts

• Higher smartphone penetration boosting data ARPU.
• Strong growth in low penetration developing markets.
• More cost savings from collaboration with DiGi.

Risks

Regulatory risks, FOREX fluctuations and competitive risks.

Forecasts

Unchanged.

Rating

HOLD, TP: RM7.05

Positives – Despite the challenging environment, Axiata’s main OpCo (Celcom, XL, Dialog) continue to execute well.

Negatives – Exposure to Indian telecom market which is currently under close scrutiny by the government.

Valuation

SOP fair value was raised by 6.3% from RM6.63 to RM7.05 (see Figure #2) after we raised XL’s valuations by imputing TG of 2.5% as well as updating the market prices for Idea and M1. However, we maintain HOLD call on the stock.

Source:Hong Leong Investment Bank Research- 27 Sep 2013