In-country consolidation in Cambodia.  Axiata has announced a strategic merger between its wholly-owned subsidiary, Hello Axiata ('Hello') and Latelz Company Ltd ('Latelz'), which operates under its main Smart Mobile ('Smart') brand name. The cash consideration for the merger will be around USD155m, subject to adjustments for the actual net debt and working capital positions as of the date of completion. Axiata will hold a 90% stake in the combined entity upon completion in 1QCY13.  

Establishing a strong market leadership position. Combodia's mobile subscribers stood at 16.7m (or a 111% penetration rate) in 1HCY12. The proposed merger will lead to the enlarged Hello entity to strengthen its subscriber market share to 25% vs. 13% before and make it the second largest player after Metfone (35% market share). We understand that Axiata has the intention to raise its subscriber market share beyond the 30% range in the next 2-3 years.    

Synergies are more focused on costs rather than revenue. The merger will provide the merged entity with improved economies of scale in its cost structure and network coverage and infrastructure within a rising revenue environment as well. Post-merger, we understand that the merged entity is eyeing for more than a 30% revenue market share in the next 2-3 years from around 20+% currently. 

An earnings accretion deal but' Based on the pro-forma consolidation account, the enlarged Hello entity is expected to record earnings of USD45.1m in 1HFY12 (vs. USD68.3m in FY11) with a significantly improved EBITDA margin of 16.2% as compared to 2.1% in FY11. Its bottom line, however, will still be at a loss of USD4m (vs. USD32m loss in FY11).

'at a premium price.Axiata indicated that the valuation methodology for the proposed merger was based on a targeted 10x EV/EBITDA, where management has valued Latelz's EV at USD180m. This  implied a 8.6x EBITDA multiple based on the proposed USD155m cash offer, or at a 21.6% premium as compared to the Asia Pacific Emerging market's telecommunication sector M&A average of a EBITDA multiplier of 7.1x in the past 12 months. Despite the premium paid, Axiata is of the view that the deal was fair judging from the current Latelz's EBITDA run rate. We understand that management is targeting Latelz's EBITDA margin to improve to beyond the 30% range in the next 2-3 years.  

Financial impact to Axiata. While the proposed merger is not expected to have any financial impact in FY12, Axiata expects its PATMI to improve by 1%-2% in FY13 as a result of cost savings synergies from the merger.

Source: Kenanga