The shares of Axiata Group Holdings (Axiata) and DiGi.Com (DiGi) were suspended all day yesterday. In the afternoon, the companies released announcements on Bursa of a proposed merger between DiGi and Celcom Axiata (100%-owned subsidiary of Axiata) to create Celcom DiGi Berhad. Macquarie Equities Research (MQ Research), in a report dated 8 April 2021, views this transaction as positive for the telecoms sector in general, with Telekom Malaysia as its top pick.

What a DiGi–Celcom Means

• Axiata and Telenor have proposed a merger of Celcom and DiGi to create Celcom DiGi Berhad, with Axiata and Telenor each owning 33.1% of the merged entity. RM2bn (RM300m from Telenor and RM1.7bn fresh debt at DiGi) will be paid to Axiata. Based on the current market cap of DiGi of RM29bn, Celcom would be valued at RM16.3bn vs the RM17.1bn captured in MQ Research’s SoP for Axiata - the difference largely in closing debt levels at the end of 2020. Based on MQ Research’s current estimates and a 5% EBITDA uplift from synergies, the merged entity would have a 2022E adj EV/EBITDA of 9.0x.
• MQ Research views this transaction as positive for the sector in general, as MQ Research believes it will provide for a more sustainable industry in the long run. Axiata realises value for Celcom upfront. DiGi saves itself increased capex to fulfil its Jendela requirements, while Celcom potentially benefits from improved processes. The merger process, which typically benefits non-merging parties, should also bode well for Maxis in the near term, MQ Research believes.

Takeaways From Three Calls on the Merger

• Details sparse. Given that the merger has been discussed thus far at the shareholder level, ie, Axiata and Telenor, with details to come from discussions at the opco levels, ie, DiGi and Celcom, details were sparse on the three calls MQ Research attended. A definitive agreement is expected to be signed in one to two months, and deal completion is expected by end-2021/early-2022.
• Focus on scale. According to the managements of Telenor and Axiata, the merger is important, because the need for scale is important to maximise value in the long run as the focus of the industry moves toward enhancing the value of customers via new services.
• First step toward more M&A? Both Axiata and Telenor played down the potential that this is the first step toward further M&A between the two groups. The only other market with overlap is Bangladesh, where MQ Research believes a merger would be near impossible given the size of the two operating entities from a market-share perspective.
• Synergies? MQ Research believes in the medium term the merged entity will derive cost savings from outsourced services, eg, rentals, network services, and capex. Assuming a 13% capex-to-service revenues ratio, the combined capex savings could be 8–10% pa vs MQ Research’s current estimates. As a base case, MQ Research assumes a 5% lift in the merged EBITDA. The merger process should be helped by the fact that Celcom and DiGi have been collaborating on network build-out for years now.
• Potential issues? Given past experiences, MQ Research thinks it natural to expect mixed news flow between now and deal completion on labour issues, pricing, etc. It was indicated that there is no intention to lay off the 3.8k staff currently employed at Celcom (2.4k) and DiGi (1.4k). Approvals from the various regulators (Securities Commission, Malaysian Communications and Multimedia Commission) and shareholders will be required once the definitive agreement is made.

Outlook

• MQ Research maintains its positive view on the Malaysia telecoms sector, with Telekom Malaysia (TM) as its top pick.

12-month Target Price Methodology

• AXIATA MK: RM3.95 based on a Sum of Parts methodology
• DIGI MK: RM3.90 based on a discounted cash flow (DCF) methodology
• MAXIS MK: RM5.82 based on a DCF methodology
• T MK: RM8.02 based on a DCF methodology
• TDC MK: RM16.70 based on a price-earnings ratio (PER) methodology

Source: Macquarie Research - 9 Apr 2021