Failed merger to put Digi, Axiata in investor spotlight

Axiata, Telenor mutually agree to end the discussions due to some complexities involved in the proposed merger

by NG MIN SHEN/ pic by BLOOMBERG

SHARES of Axiata Group Bhd and Digi.Com Bhd are expected to be punished today after Axiata and Telenor ASA, Digi’s parent, ended talks on a proposed non-cash merger of their Asian telecommunications and infrastructure assets.

Last Friday, both telecommunications companies announced the decision through statements issued to Bursa Malaysia and the Oslo Stock Exchange.

Digi also released a similar statement on Bursa Malaysia the same day, adding it was informed last Friday by Telenor of the decision.

Trading of Axiata and Digi shares was suspended from 2.30pm last Friday pending the announcement. The stocks resume trading today.

“Over the last four months, both parties have been working on due diligence and finalising transaction agreements to be completed within the third quarter of 2019 (3Q19).

“Due to some complexities involved in the proposed transaction, the parties have mutually agreed to end the discussions,” Axiata and Telenor stated.

Both parties still acknowledge the strong strategic rationale of the proposed transaction. They also “do not rule out a future transaction could be possible”.

Axiata closed the morning trading session 2.31% higher at RM4.88 last Friday, while Digi was 0.2% weaker at RM4.89.

Telenor shares fell sharply, the steepest intraday decline in about three years, according to Bloomberg data.

The stock fell to a low of 175.3 kroner (RM81.80) from its previous close of 185.4 kroner before some mild buying last Friday saw the stock trade unchanged at 179 kroner the time of writing.

“We continue to actively explore possible consolidation and portfolio optimisation opportunities to extract synergies, maximise efficiency and fund future growth areas,” Axiata president and group CEO Tan Sri Jamaludin Ibrahim said.

The group chairman Tan Sri Ghazzali Sheikh Abdul Khalid added that the board acknowledges the rationale of the proposed merger and is “equally cognisant of the level of complexity of such a deal” that extends across nine countries and 14 entities.

“Regardless of the expressed synergies of the merger, we are confident the termination of the proposed transaction does not affect the group in achieving its digital champion ambitions,” he said.

Axiata and Telenor had in May announced their intention to combine their Asian operations to create an international merged company, in response to rising data monetisation cost, heightened competition and the need to increase capital expenditure despite flat revenue growth.

Telenor was anticipated to own 56.5% of the proposed enlarged entity due to its larger asset size, while Axiata would hold 43.5%.

The deal was said to deliver up to RM20 billion in incremental value via asset consolidation and economies of scale, while Axiata had said it expected to achieve up to RM5 billion in savings from Malaysia alone over a period of five to seven years.

The proposal also involved plans to merge Celcom Axiata Bhd and Digi to become Malaysia’s largest mobile operator. Telenor controls 49% of Digi, while Celcom is wholly owned by Axiata, which in turn is 36.93%held by Khazanah Nasional Bhd.

Less than two weeks ago, Jamaludin said at a press briefing (on Aug 29) that merger discussions were still ongoing. He was “optimistic” a deal would go through, with an agreement to be signed by November as planned.

It was reported that the two parties were facing difficulties in negotiating the terms of control over the merged entity, as well as issues of national and staff interests.

Prime Minister Tun Dr Mahathir Mohamad was reported to have asked for details on the now-failed merger due to concerns over potential job losses.

Although both Axiata and Telenor said there would not be any retrenchments, both parties would most certainly have had to eliminate duplication of functions across their operations.

After abandoning the merger plans, Telenor will need to redouble efforts to cut costs and revive growth across its Asian units, Bloomberg Intelligence wrote in a note last Friday.

The deal would have added about 40% to Telenor’s sales and earnings before interest, tax, depreciation and amortisation and 30% to free cashflow.

“Asia is Telenor’s biggest source of opportunity and risk, in our view, particularly Myanmar, where a newentrant fourth operator is proving disruptive,” it said.

It also said Digi would be vulnerable to rising cost pressure, as it’s likely to step up capital spending with the launch of Malaysia’s 5G tender planned for 4Q19.

“The carrier also needs to quicken its push into the fixed broadband space. Digi can still generate some savings if it collaborates with Celcom on its 5G network rollout,” it said.