The tie-up — touted by both telcos as a ‘merger of equals’ — has garnered interest from all corners of the industry
by NG MIN SHEN/ pic by TMR FILE
ABOUT three months ago, Malaysia’s Axiata Group Bhd and Norway’s Telenor ASA announced one of the biggest proposed deals in the history of the local and regional telecommunications industries.
Axiata, one of Malaysia’s biggest telecommunications companies (telcos), and Telenor, a pioneer in the Norwegian telco space, said they intend to merge their Asian operations within Asean and South Asia in a non-cash deal. This also includes plans to combine Celcom Axiata Bhd and Digi.com Bhd into the country’s largest mobile operator.
Naturally, the tie-up — touted by both telcos as a “merger of equals”, birthed in response to mounting industry challenges — has garnered interest from all corners of the industry.
For starters, Axiata is a homegrown company, created when sovereign wealth fund Khazanah Nasional Bhd demerged the mobile business of Telekom Malaysia Bhd (TM) from the fixed-line segment in April 2008.
The group, which remains a subsidiary of Khazanah, operates in Malaysia through Celcom and is also present in Indonesia, Bangladesh, Pakistan, Nepal, Cambodia, Sri Lanka, Thailand, Singapore and India.
Meanwhile, Telenor — based in Fornebu, just outside Oslo — has mobile operations across Norway, Sweden, Denmark, Pakistan, Bangladesh, Thailand, Malaysia and Myanmar. In Malaysia, it controls a 49% stake in Digi, known as one of the country’s “Big Three” telcos alongside Celcom and Maxis Bhd.
Under the proposed deal, the merged Asian operations of both companies will form a “MergedCo” in which Telenor is expected to own a majority stake of 56.5% due to its larger asset size. Axiata will hold the remaining 43.5% interest and will have the right to appoint the company’s chairman.
In response to claims that this could be a dilution of national interest, Axiata group CEO Tan Sri Jamaludin Ibrahim (picture) said the “national aspiration of the MergedCo will continue”, with the shareholding breakdown being “purely a reflection of our assets” as the new company will continue its focus on Axiata’s development programmes for vendors and digital entrepreneurs, among other local efforts.
Jamaludin added that the merged Celcom-Digi entity, known as “MalaysiaCo”, will also be run largely by locals, though about 66% of the firm will be held by the MergedCo.
“We’ve agreed already in writing that the chairman (of the MalaysiaCo) will be Malaysian, the majority of the MalaysiaCo board will be Malaysians, and the CEO will be Malaysian.
“On culture, Telenor has been here long enough to respect that they have to be run by Malaysians. Ownership and the way we manage can be two different things,” he told reporters after Axiata’s AGM in May this year.
Consumers have also voiced concerns that the merged party would create a monopoly, with Maxis being the only sizeable challenger. Jamaludin has acknowledged that the merged firm would command over 50% of the local mobile market. However, merging two seasoned telcos could also provide affordable pricing, better quality and improved coverage.
Celcom’s plans are generally priced in the mid-to higher-end range, while Digi fights at the entry to mid-range price points. Celcom is also known to have good service coverage in non-urban areas, while Digi has been improving its urban coverage after the 2016 spectrum refarming exercise.
Thus, merging the two could easily create a more well-rounded telco. Celcom ended the first quarter of 2019 (1Q19) with 8.95 million subscribers, while Digi had 11.25 million subscribers.
Customers also stand to benefit from cost savings reaped from the proposed transaction, which could deliver up to RM20 billion in incremental value through synergies via consolidation of assets and economies of scale.
While the parties haven’t announced their plans for 5G under the merged entity, it’s likely that some of the cost savings will go towards preparing infrastructure for 5G — the next generation of cellular network technology, said to be anywhere from 100 to 400 times faster than 4G, yet with lower latency (the time required for devices to communicate via wireless networks).
The MergedCo will have a proforma revenue of over RM50 billion, earnings before interest, taxes, depreciation and amortisation (Ebitda) of more than RM20 billion, and profit after tax of circa RM4 billion, plus some 267 million customers in nine countries versus 150 million customers in six countries today.
As for the Celcom-Digi entity, it’s expected to deliver a proforma revenue of around RM14 billion, Ebitda of some RM5 billion and an estimated 21 million customers, plus the biggest share of the domestic revenue market at 35%. High cost of data monetisation, heightened competition and the need for increasing capital expenditure (capex) despite flat revenue growth — these were the reasons cited for the merger.
The advent of 5G is a grave concern for most telcos, as the benefits of 5G due to its speed and lower latency are so great that it cannot be ignored, yet deploying the technology comes at a high cost.
DBS Bank Ltd in a May note said Singaporean telcos may incur between S$1 billion (RM3.02 billion) to S$1.5 billion in 5G capex over a period of 10 years. GSMA Intelligence in its 2025 capex forecasts, released in April, predicts operators worldwide will spend just under US$1 trillion (RM4.2 trillion) on 5G.
If all goes well, the MergedCo will undergo dual listing on Bursa Malaysia and another major international exchange within the next few years. This could provide international exposure for investors, although this depends on the details of the listing exercises.
For all its plus points, the scale of the merger has also attracted the attention of the regulator. The Malaysian Communications and Multimedia Commission (MCMC) told The Malaysian Reserve in May that while it’s “always open to initiatives by the industry”, the regulator will “evaluate all angles of the proposal” before giving the green light for the deal.
Just two weeks after Axiata and Telenor announced their plans, the MCMC released a set of guidelines on mergers and acquisitions, although Jamaludin later said the guidelines were “developed some time ago and expedited because of us, but not because of us per se”. He also said Axiata and Telenor had already met with MCMC chairman Al-Ishsal Ishak and Communications and Multimedia Minister Gobind Singh Deo to present the proposed merger, although he did not say if the initial meeting indicated approval from the regulator and minister.
JF Apex Securities Bhd has said the MCMC will have to decide on whether the Celcom-Digi merger would “curtail competition based on its Guideline on Substantial Lessening of Competition 2014”, while Hong Leong Investment Bank Bhd and MIDF Amanah Investment Bank Bhd said the enlarged entity might trigger regulatory risks and business conflicts.
Analysts have also said synergies from the merger can only be reaped if Axiata and Telenor consolidate their operations well, as neither can afford redundancies. To that end, Jamaludin has stressed that there will be no retrenchments from the merger.
“Nobody will be forced out from the system. Inevitably, when you combine the companies, there will be duplicate functions. Our first step is to retrain them to do something else but remember, we’re a growing company — we’re going into new areas,” he said.
In response to whether voluntary separation schemes will be offered and how many heads will qualify, Jamaludin said the two parties have yet to discuss the matter.
Both parties are currently working towards a binding agreement for the proposed merger, slated for completion by end-3Q19, following related due diligence. Obtaining the necessary approvals will then require another six to nine months, thus placing the birth of the merged global entity sometime around 3Q20.
It is work-in-progress for the multibillion deal and if it happens, it is guaranteed to be a game-changer for the country and the telco sector.