Axiata's 63% subsidiary edotco has proposed to acquire 2,973 telecom towers and related assets via its wholly owned subsidiary in the Philippines through a sale and leaseback transaction with the subsidiaries of PLDT Inc for a total consideration of PHP42bn (RM3.42bn). The deal implies an EV/EBITDA of 15x at a premium as the acquisition will make edotco the leading independent tower company (ITC) with 3,073 towers in the Philippines. BUY with a TP of RM4.30 based on FY22E EV of RM39.5bn as the additional debt takes effect only in FY23.

We are not surprised by this announcement as edotco is clear that they will grow either organically or inorganically to be the Top 5 globally and Top 3 in Asia in terms of tower count by 2024. The RM3.42bn purchase price implies an EV/EBITDA of 15x – higher than its acquisition of Touch Mindscape (TMs) recently at 13x EV/EBITDA but cheaper overall as the TM acquisition involves c.1,000 towers vs. PLDT’s c.3,000. In addition to the sale and leaseback of the towers, PLDT has also committed to place orders for an additional 750 towers. Post transaction, edotco will own and manage a total of 54k telecommunication infrastructure assets.

We believe edotco's main rationale for this acquisition are: (i) for the aforesaid 2024 goals, and (ii) to ride on the continued growth in demand for telco infrastructure, namely tower and fiber, for 5G rollout. It is also to: (i) to ride on the Philippines robust economic growth, (ii) become the leading ITC in the Philippines (>3k towers), (iii) leverage edotco’s operational excellence and innovative infrastructure solutions to unlock synergies, and (iv) enhance the diversification and optimization of edotco’s portfolio.

While the acquisition helps edotco taking another step towards its 2024 targets, it is earnings dilution in the near term but earnings accretive in the mid to long-term. While edotco is paying a premium, we think it is justified given the scarcity of tower assets in Malaysia available for acquisitions. Looking ahead, this could set a precedent for future tower deals to also fetch higher multiples.

Source: Rakuten Research - 21 Apr 2022