Axiata-Telenor non-merger wipes RM9.2b off market cap

by NG MIN SHEN/ graphic by TMR

INVESTORS fled from Axiata Group Bhd and DiGi.Com Bhd yesterday after their proposed merger to create the country’s largest telecommunications company (telco) fell through last week, erasing RM9.2 billion in combined market capitalisation.

Shares of Axiata dropped as much as 18% to as low as RM4.01 before recovering at RM4.11 and about RM7.03 billion in market value vanished as investors took flight after the company and Telenor ASA called off talks for a merger of their Asian operations.

Axiata closed 15.8% lower yesterday, the biggest move since the telco’s initial public offering (IPO) in 2008 and almost 30 times the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI), according to Bloomberg data.

Digi, which is 49%-controlled by Telenor, fell 5.9% to close yesterday’s trading at RM4.60, the most in about nine years and 11 times the FBM KLCI. The main index only declined 0.5%, while the MSCI AC Asia Pacific Index gained 0.4%.

Both counters were suspended during last Friday’s afternoon trading session.

Yesterday’s selldown trimmed Axiata’s market value to RM37.7 billion. Digi saw about RM2.26 billion of its market capitalisation wiped off from the market, valuing the company at RM35.765 billion.

“Axiata and Digi’s share prices ran up in anticipation of the merger when it was first announced back in May. Hence, with the merger now off, share prices have fallen back to premerger talk levels,” Rakuten Trade Sdn Bhd research VP Vincent Lau told The Malaysian Reserve.

Despite yesterday’s drubbing, Axiata and Digi are up 4.58% and 2.22% respectively year-to-date, while the FBM KLCI is down by 5.6%.

Last Friday, Axiata and Norway-based Telenor issued statements to Bursa Malaysia and the Oslo Stock Exchange announcing their mutual decision to end discussions for the proposed non-cash merger. Digi also released a similar statement to Bursa Malaysia on the same day.

Trading of Axiata and Digi shares resumed at 9am yesterday, after they were suspended from 2.30pm last Friday pending the announcement.

“It wasn’t an easy transaction to begin with, though it makes sense. On a brighter note, rather than delaying and extending merger talks, now both parties can refocus on their strategies and grow their business,” Lau added.

Both stocks hit their intraday lows early in the morning trading session. Axiata’s intraday low of RM4.01 was 17.8% weaker than its previous close of RM4.88, while Digi plummeted as much as 12.1% to RM4.30 before recouping some losses.

Axiata saw 41.06 million units done, while Digi saw 18.22 million shares changing hands. Eight analysts downgraded Axiata, while two downgraded Digi.

Telenor was not spared either; as at press time, the stock was 0.6% lower at 175.15 kroner (RM81.38). Last Friday, Telenor shares recorded their steepest intraday decline in three years following the announcement.

Axiata and Telenor announced in May their intention to merge their Asian operations, in an effort to combat rising data monetisation costs, heightened competition and the need to increase capital expenditure despite flat revenue growth.

The deal was envisioned to deliver up to RM20 billion in incremental value, and would have also seen the merger of Digi with Celcom Axiata Bhd to create Malaysia’s largest mobile operator.

BIMB Securities Sdn Bhd said the announcement came as a surprise after Axiata denied rumours of the deal falling through at its recent results briefing.

“Management cited that the termination was due to complex issues which we believe could have predominantly arisen from the regulatory standpoint at both the domestic and regional levels,” it wrote in a note yesterday.

The research house is cautious on Axiata’s near and mid-term prospects, given its legacy issues at Celcom — its Malaysian business, and exposure to regional markets which has been volatile due to currency fluctuations and hostile regulatory changes.

BIMB Securities downgraded Axiata to ‘Trading Sell’, although it maintained a ‘Hold’ call on Digi.

“Digi’s outlook remains stable, underpinned by its advantage to capitalise on parent Telenor’s expertise to better deploy resources compared to peers,” it said.

Kenanga Investment Bank Bhd said possible reasons for the cancelled merger include issues of national interest, political pressure in Indonesia relating to the European Union’s anti-palm oil stance, complications in spectrum allocation and potential job losses in the long term.

“Although the merger plan with Telenor has come to a close, management did not discount the possibility of consolidating with other regional players in the market, should there be opportunities which make business sense,” it added.

Hong Leong Investment Bank Bhd (HLIB) said the announcement was a negative surprise, as the proposed merger fell through at an early stage.

Axiata and Digi may experience selling pressures as investors reassess their valuations based on fundamentals, while competition intensity will continue in the domestic industry with the current five mobile network operators .

Rivalry will also be focused on spectrum allocation, particularly on the prized 700MHz band as the regulator intends to split it into just four blocks of 2x10MHz.

“Axiata shared that there is no such plan for a re-merger with Telekom Malaysia Bhd (TM) but instead will work even closer with TM on fibre network in order to drive convergence and 5G,” HLIB added.

The telco also said it will revisit its monetisation plan for edotco Group Sdn Bhd while not ruling out other avenues besides an IPO. Options for its digital businesses will also be evaluated, although no timeline was provided.