Axiata-Telenor JV to induce competition in pricing, network

By SULHI KHALID

The proposed merger of Axiata Group Bhd and Telenor ASA’s telecommunication and infrastructure assets in South Asia will signify the importance of scale for telco industries to compete in data pricing, network capacity and spectrum holdings.

According to Fitch Ratings Inc, the merged entity (MergeCo) will command better pricing power, with stiff competition resulting in telcos seldom being able to price data to capitalise fully on the rapid growth in data consumption.

The data consumption currently averages about 11GB per user a month, up from 7GB a year ago.

“The enlarged entity would become the largest domestic mobile operator, with a combined market share of over 50%, and 35% of total revenue share across the domestic fixed and mobile sectors, surpassing fixed-line operator Telekom Malaysia Bhd,” the rating firm stated in a report yesterday.

Fitch highlighted that continuous investment is needed to maintain the growth in the highly competitive Asian telecommunication market.

Earlier this week, both companies announced a preliminary discussion to merge their assets in nine Asian countries.

The MergeCo, which will see Telenor having a 56.5% stake with Axiata owning the remaining 43.5%, will create the country’s largest cellular operator with 21 million handphone subscribers in Malaysia and
267 million customers in nine countries.

Fitch stated that the proposed deal will reap most synergies in Malaysia, as both parties have an equal presence in the local market. Telenor — a Norwegian firm — has a 49% stake in Digi.Com Bhd.

The limited geographical overlap in other markets, including Indonesia, Thailand, Sri Lanka, Pakistan, Nepal, Myanmar, Cambodia and Bangladesh, would offer cashflow diversification and regional exposure to 300 million subscribers.

The deal, however, excludes Axiata’s Bangladeshi operations held under Robi Axiata Ltd, which will be continued independently by Axiata.

Meanwhile, Fitch said changes to the parent-subsidiary relationships of Axiata and its 66%-owned Indonesian subsidiary, PT XL Axiata Tbk, and Telenor and Total Access Communication pcl (DTAC), the third-largest Thai mobile operator, could prompt re-assessments of the level of parental support for these subsidiaries.

“We use a top-down method in assessing XL with Axiata as a basis, reflecting XL’s strategic and financial importance to its parent.

“Fitch rates DTAC on a bottom-up approach and the Thai telco receives a one-notch uplift to reflect moderate linkages with Telenor,” the research house added.

The proposed merger is also consistent with Axiata’s ambitions for in-market consolidation, as well as a portfolio review for Telenor, which has divested its Eastern European businesses and Indian operations, and acquired a mobile operator in Finland to focus more on its home Nordic market,“ Fitch said.

Axiata expects the MergeCo to realise synergies worth RM15 billion to RM20 billion over five years through consolidation of assets and economies of scale.

Fitch said this, together with plans to list the MergeCo and the global tower operations, provides financial headroom
for expansion into mobile and broadband, particularly in Indonesia.

According to Fitch, XL has been aggressively expanding its mobile network and capacity in areas outside Java, where incumbent PT Telekomunikasi Selular (Telkomsel) has a near monopoly with a share of about 80%.

“It would be challenging for XL to match the incumbent’s mobile-network footprint and convergence capabilities of Telkomsel’s 65%-parent PT Telekomunikasi Indonesia Tbk. XL, as a mobile-only operator, has limited fixed-mobile convergence capabilities.”

While in Thailand, the DTAC has been facing capital expenditure and cashflow pressure.

Despite the Thai government’s approval to spread 900MHz spectrum payments over several instalments, Thai telcos will have to acquire 700MHz in the upcoming spectrum allocation, likely in the third quarter of 2019, as a condition for the payment extension.

“The local regulator has also indicated that there may be an auction of 5G spectrum this year. Fitch expects DTAC to step up marketing promotions to regain market share, potentially delaying Ebitda (earnings before interest, tax, depreciation and amortisation) recovery to 2020,” the agency said.