Proposes to Merge XL Axiata and Smartfren in Indonesia

Axiata Group Berhad's Indonesian subsidiary, XL Axiata, has entered into a definitive agreement with Sinar Mas to proceed with the proposed merger of XL Axiata, PT Smartfren Telecom Tbk (Smartfren), and Smartfren's subsidiary, PT Smart Telcom (SmartTel), in Indonesia. The merger involves the effective transfer of Smartfren and SmartTel to XL Axiata, with XL Axiata issuing 5.1bn new ordinary shares at an issue price of 2,350 rupiah or 65.6sen per share to acquire the entities for a total purchase consideration of RM3.3bn. The merged entity, to be named PT XLSmart Telecom Sejahtera Tbk (XLSmart), will continue to be listed on the Indonesia Stock Exchange.

To achieve an equal controlling shareholding stake in the merged entity XLSmart, Axiata Investment (Indonesia) Sdn Bhd will dispose of 2.4bn shares in XLSmart to PT Bali Media Telekomunikasi, a substantial shareholder of Smartfren, for a cash consideration of USD475.0mn (RM2.1bn). Axiata intends to use the proceeds arising from the shareholding equalisation to pare down debt. Upon completion of the deal, Axiata and Sinar Mas will become joint controlling shareholders, each holding a 34.8% stake in XLSmart, while public shareholders will hold the remaining 30.4%.

Both Axiata and Sinar Mas will have a similar number of board representatives and committee members in XLSmart. The proposed merger is subject to the approval of relevant shareholders and regulators, as well as customary closing terms and conditions. The deal is expected to be completed by 1H2025.

Our View

We are not surprised by this news, given that the group had previously entered into a non-binding agreement, dated 15 May 2024, with Sinar Mas to explore a merger of XL Axiata and Smartfren.

Overall, we are positive about this proposed merger. The merger will likely create synergistic benefits, which include i) reducing the duplication of infrastructure, ii) better cost efficiency via opex savings from business integration, and iii) strengthening distribution channels. On top of that, it will facilitate better spectrum efficiency and CAPEX synergies to improve service quality. Based on management's guidance, this merger will be able to realise estimated annual run-rate pre-tax synergies of USD300.0mn to USD400.0mn, post-completion of integration. Meanwhile, XLSmart is expected to generate pro forma revenue of USD2.8bn and EBITDA of USD1.4bn.

Additionally, the proposed merger will help reduce the competitive pressures within Indonesia's telco space. Currently, XL Axiata and Smartfren are ranked 3rd and 4th in terms of mobile market share in Indonesia, with 58.6mn and 35.9mn subscribers, respectively. Post-merger, XLSmart will be ranked 3rd with 94.5mn subscribers, representing about 27.0% of the local market share, after Telkomsel (156.8mn) and Indosat (98.8mn). This will transform Indonesia's mobile market into a three-player structure.

In terms of valuation, the equalisation consideration is carried out based on an implied EV/EBITDA multiple of 5.3x, which appears reasonable, considering that peers are generally trading around the similar multiples range. (Refer to Table 2)

Forecast

No change to our FY24-FY26 earnings projections at this juncture, pending the shareholder and regulators' approval for the proposed merger.

Valuation

No change to our target price of RM2.65, based on SOTP valuation and a 3% ESG premium. Maintain a Buy call on Axiata. Key downside risks include heightened competition, macroeconomic headwinds, and regulatory uncertainties.

Source: TA Research - 12 Dec 2024