News

Axiata has entered into an agreement with Bharti Airtel Limited (BAL) for the proposed merger of their respective subsidiaries in Bangladesh, namely 91.6%-owned Robi Axiata Limited (Robi) and Airtel Bangladesh Limited (ABL).

At 100%, the Implied Enterprise Value on cash-free debt-free basis of the abovementioned merged entity is in the range between USD1.85b to USD2.2b (equivalent to approximately RM7.86b to RM9.34b).

The agreement shall be satisfied via the issuance of new ordinary Robi shares to BAL of up to 25% (or c.1.2b) plus 1 Robi share on a fully diluted basis of the combined entity of Robi and Airtel.

The deal is expected to be completed by 1H16. Upon completion, Axiata will own 68.7% in the combined entity, 25.0% by BAL and 6.3% by NTT DOCOMO of Japan.

The proposed acquisition which is subject to the approvals from Bangladesh’s authorities. Robi and BAL shareholders have already resolved to approve the proposed merger during their respective shareholder meetings in Dec15.

Comments

We were not surprised by the news given that management has shown its intention in last September.

We understand that the proposed merger will allow Robi to: (i) tap into ABL spectrum bands (details as below) to expand the lucrative mobile data services (ii) extend its reach to 40m customers (from current 28.4m from Robi) which will in turn become the number two mobile operator, as well as (iii) enhance its operational efficiencies through network assets sharing and better operational scaling.

While the proposed merger is expected to dilute Axiata’s consolidated earnings for FY16 (due to the consolidation of BAL’s net loss of c.RM455.2m in March 2015), management expects synergistic benefits in the medium to long term (should the integration materialised successfully).

Outlook

Increasing competition, currency fluctuation and regulatory challenges will continue to be key challenges faced by Axiata’s OpCos.

Forecast

We made no changes to our FY15E-FY16E earnings for now, pending further details from management guidance.

Rating

Maintain at OUTPERFROM

Valuation

Our TP, however, is trimmed to RM6.30 (from RM6.92 previously), after lowering the targeted FY16 EV/forward EBITDA to 7.8x (from 8.4x previously) representing -1.0 below its 4-year mean. (Please refer to today’s sector report (title: Feeling The Heat) for further details).

Risks to Our Call

Regulation and currency risks in its overseas ventures.

Source: Kenanga Research - 29 Jan 2016