Axiata and Telenor Asia are in advanced discussions on the merger of Celcom and Digi. Axiata will receive newly issued shares in Digi representing 33.1% post - transaction shareholding and cash equalisation amount of RM2bn. We are positive on this development as market consolidation usually leads to (1) healthier market rivalry (i.e. less price undercutting for market share); (2) improved operational leverage; (3) effective capex spending (no duplication); and (4) more procurement bargaining power. Maintain NEUTRAL and reiterate our emphasis on fixed over mobile as they are the prime beneficiaries in broadband/5G infra deployments. Our top picks are TM (BUY, TP: RM7.88) and TdC (BUY, TP: RM16.88).

NEWSBREAK

Axiata and Telenor Asia are in advanced discussions on the merger of Celcom and Digi, in which each with have equal ownership circa at 33.1%. Axiata together with Malaysian institutional funds will own over 51% of the MergeCo (see Figure #1).

Transaction. Axiata will receive newly issued shares in Digi representing 33.1% post transaction shareholding and cash equalisation amount of RM2bn, of which RM1.7bn to come from Digi as new debt, balance of RM300m from Telenor.

MergeCo financials. It will be considered a leading telco in Malaysia in terms of value, with pro-forma revenue of about RM12.4bn, pre-synergy EBITDA of RM5.7bn and an estimated 19m subscribers (see Figure #2).

Rationale. (1) Support MyDigital aspirations; (2) commercially stronger and more resilient; (3) Restore long term sustainability to the industry; (4) Deriving significant value creation from synergy realisation; and (4) multiple benefits for the broader Malaysian economy (reduced imports through network purchase efficiencies, larger platform for local talent and vendors, and ability to attract foreign fund inflows).

Key nominations for MergeCo. Chairman: Dato’ Izzaddin Idris (Axiata CEO); Vice Chairman: Jørgen C. Arentz Rostrup (Head of Telenor Asia); CEO: Idham Nawawi (Celcom CEO); and DCEO: Albern Murty (Digi CEO).

No forced layoffs. Employee protection through retrain/switch roles and potentially VSS. Axiata and Telenor have also agreed to the creation of a world-class Innovation Centre to catalyse 4IR digital transformation, development of 5G use cases and other technological advancement. This initiative will also play a direct role in upskilling employees for the future economy.

Approvals required. This transaction will be subject to relevant board and shareholders approvals by Digi and Celcom, receipt of regulatory approvals and other customary terms and conditions.

Timeline. Finalizing agreements within 2Q21 following due diligence and expect to complete the exercise latest by 1Q22.

HLIB’s VIEW

A good move. Despite the scarcity of information, we are pleasantly surprised by this development. Market consolidation usually leads to (1) healthier market rivalry (i.e. less price undercutting for market share); (2) improved operational leverage; (3) effective capex spending (no duplication); and (4) more procurement bargaining power.

Regulation risk. The MergeCo will be the largest telco with revenue and subs market share of circa 34% and >40%, respectively. However, the companies believe that this is an addressable issue by taking into consideration of OTT market share. Although MergeCo will have the largest airwave holdings, we do not think this will attract any concern due to its large subscriber base.

Digi over Axiata. We think Digi will be the direct beneficiary from any success from the MergeCo, while Axiata may not be able to monetize that immediately and at the same time, safeguarding national interest in the MergeCo. We also do not discount the possibility that the MergeCo will consolidate its towers by maximizing the usage of Digi towers, thus reducing its tower rental from edotco.

Forecast. Unchanged for now pending more detailed info on the merger.

Maintain NEUTRAL and reiterate our emphasis on fixed over mobile as they are the prime beneficiaries in broadband/5G infrastructure deployment. Our top picks are TM (BUY, TP: RM7.88) and TdC (BUY, TP: RM16.88). We have HOLD ratings on both Axiata (TP: RM3.78) and Digi (TP: RM4.00).

Source: Hong Leong Investment Bank Research - 9 Apr 2021