Axiata is in discussions with Telenor over a potential non-cash combination of their telecom and infrastructure assets in Asia. Telenor should own 56.5% in the MergedCo (based on equity value) and Axiata the remainder 43.5%, subject to adjustments and due diligence. We view the proposal as a win-win transaction for both Axiata and Digi shareholders. The combination of Telenor’s strong management team and Axiata’s vast geographical footprint should result in substantial business and cost synergy. Besides, the transaction should help unlock Axiata’s SOP valuation. We upgrade both Axiata and Digi to BUY (from HOLD) with a higher TP of RM5.20 and RM5.00 respectively.

A Promising Marriage – Enlarging Scale, Reaping Synergies

According to Axiata’s media release, the merged entity (MergedCo) will have proforma revenue of more than RM50bn, EBITDA of more than RM20bn, operating subsidiaries in nine countries (Fig 1) with 300m customers and operating c.60,000 towers across Asia. The MergedCo will be one of the largest telecommunications groups in the region in terms of value, revenue and profit. Axiata and Telenor expects the proposed transaction to have the potential to deliver RM15-20bn incremental value in synergies (over 5 years) through consolidation of assets, economies of scale and scope.

The Preliminary Deal Structure: 1 + 1 = 5

Under the preliminary plan, the parties intend to list the MergedCo on Bursa Malaysia and another major international exchange within the next few years. In addition to the MergedCo, the parties also intend to create the largest mobile operator in Malaysia by merging Celcom Axiata and Digi.Com. The proposal will also potentially lead to the formation of a global top five mobile infrastructure player by combining edotco and Telenor’s Asian tower assets. Also, we expect Axiata to remain listed as a holding company with shareholdings in the MergedCo, Robi Axiata Limited (excluded from the merger due to antitrust concerns), Axiata Digital Services and an investment in Vodafone Idea Limited. Lastly, the parties intend to create a regional innovation centre in Malaysia focusing on 5G, IoT, etc.

The Deal Is Subject to Due Diligences, Discussions and Approvals

Axiata said that there is no certainty that these discussions will result in any binding agreement or obligations on the parties to proceed with any acquisition, merger or divestment. Nonetheless, the parties are working in good faith towards a binding agreement by end of 3Q2019. Should the parties agree to sign an agreement, the eventual transaction will be subject to approvals by shareholders and regulatory bodies in several countries.

We like the deal. Upgrade Axiata and Digi to BUY with higher target prices; key risk is termination of the deal

We are positive on the proposed transaction. The combination of Telenor’s strong management team and global best practices with Axiata’s vast geographical footprint should result in substantial business synergies and cost savings. For Axiata, the transaction will also help unlock the value of its underlying operating companies and narrow its holding company discount. We upgrade Axiata to BUY with a higher TP of RM5.20 (from RM4.09) after raising our target EV/EBITDA multiple for Celcom to 12x (from 10x) and removing the 15% holding company discount (Fig 6). We also upgrade Digi to BUY with a higher TP of RM5.00 after incorporating a lower WACC and higher long-term growth of 1.5% (from 1.0%), expecting the proposed merger to enhance its long-term growth profile. Key risk to our positive view is an unexpected termination of the deal.

Source: Affin Hwang Research - 7 May 2019