• Merger blues. We see a knee-jerk selldown on Axiata Group and DiGi.Com (Digi) shares following the Statement of Issues (SOI) raised by the regulator on the proposed merger. The ball is now in the telcos’ courts to address concerns presented within 30 days. The risk of a dissenting view is low in our view, as the regulator previously maintained an accommodative stance on market consolidations and the merger construct. We continue to like the fixed players, given their stronger re-rating catalysts, with Telekom Malaysia, Time dotCom, and OCK Group as preferred picks. NEUTRAL.

• So near yet so far. Both Axiata and Digi have been served with SOIs on 1 Apr by the Malaysian Communications & Multimedia Commission or MCMC on preliminary concerns over market competition that could arise from their proposed merger. Both were requested to submit additional comments and information on: i) The national retail market for mobile and low-speed fixed broadband and data services, ii) national retail market for mobile voice and person-to-person (P2P) messaging services (including the related local distribution channel market or markets), iii) national wholesale market for mobile voice and P2P messaging services (including network sharing arrangements), and iv) national wholesale market for mobile broadband services (including network sharing arrangements). We think the SOIs may have triggered renewed concerns over merger execution. The development has also caught the market off guard, as Axiata and Digi’s management teams had earlier indicated – during their results call and briefings – that the integration process is progressing as planned.

• What is an SOI? According to the regulator’s Guidelines on Mergers & Acquisition or GMA, the SOI sets out the preliminary findings from Phase 2 of the assessment process (Phase 1 was completed earlier) and will specify grounds on which it believes the merger may contravene or has contravened Section 133 of the Communications & Multimedia Act or CMA (see Figure 1 on the process flow). The SOI essentially means the regulator reached a view that it is likely to issue an unfavourable decision but reserves its final decision pending the feedback and inputs from the telcos on points raised. Both Celcom and Digi will continue to engage closely with the regulator and are required to respond to their SOIs within 30 days.

• There is a likelihood of a dissenting view/decision by the regulator. The regulator may issue a notice of no objection if it is satisfied that the merger does not have, or does not have, or is not likely to have the effect of substantially lessening competition in the market nor result in a dominant position. While there is a possibility that a dissenting view may be issued (notice of objection), we think the risk is low, as the regulator had previously maintained an accommodative stance on market consolidation and the merger construct. The SOIs could potentially delay the timeline for completion of the merger, which was initially set for end 2Q22.
• Key risk is an unfavourable decision by the regulator. We see the uncertainty as a near-term overhang on both stocks.

Source: RHB Securities Research - 4 Apr 2022