Consolidation will lead to less competition

The potential merger of Celcom and Digi is expected to generate synergies from cost optimisation, among others


THE possible merger between Celcom Axiata Bhd and Bhd would allow the combined entity to better compete in the 5G environment via scale, improved balance sheet and operational execution.

With 5G services offered via a wholesale arrangement (5G special purpose vehicle), mobile operators no longer need to spend heavily on capital expenditure (capex) but instead focus on price and branding, said RHB Investment Bank Bhd analyst Jeffrey Tan.

“Consolidation would, however, see the number of operators reduced and by extension, result in lesser competition,” he told The Malaysian Reserve.

On April 8, Axiata Group Bhd and Telenor Asia Pte Ltd announced that they are in advanced discussions on the potential merger of Celcom and Digi, with the joint entity to be known as Celcom Digi Bhd or MergeCo.

Axiata and Digi will have an equal stake of about 33.1% each in MergeCo, while Axiata together with local institutional funds will own over 51% of MergeCo.

The merged entity would have a combined 19.1 million customers and total revenue of RM12.4 billion.

Whether this merger fails or succeeds, Jeffrey said it is imperative for mobile operators to consider the longer-term sustainability of the industry and to collaborate in ways to ensure their continued existence in the face of digitalisation.

“There are lower execution risks with this proposal in that the scope of the merger is significantly smaller and national interests are taken into consideration,” he added.

Both telecommunications companies (telcos) will work towards finalising the agreement in relation to the proposed transaction within the second quarter of 2021 (2Q21) following due diligence and are expected to complete the exercise latest by 1Q22.

Investors appear to welcome the merger plan. On resumption of trade last Friday, Digi surged 71 sen or 18.93% to RM4.46, while Axiata rose 31 sen or 8.16% to close at RM4.11 per share.

While the parties have committed to no forced layoff of staff, the option of voluntary separation schemes and retraining programmes may be introduced.

AmInvestment Bank Bhd (AmInvest) analyst Alex Goh said the merged entity is expected to generate synergies from cost optimisation, re-engineering of network operations, reduced redundancies and procurement rationalisation.

“Additionally, the merger aims to catalyse revenue growth from dual-brand strategy, integrating operations, digitalisation and coordination on home fibre convergence play.

“The enlarged scale of operations will also provide additional financial flexibility for future capex rollouts,” he noted in a report last week.

Assuming a 10% reduction in operating expenditures and capex for the combined entity, AmInvest estimated potential savings of RM4.3 billion over five years, which translates to 10% of Celcom Digi’s potential market capitalisation of RM41 billion.

This is based on Digi’s current share price which has been adjusted for the RM1.7 billion cash outflow.

AmInvest reckons that Digi could benefit more than Celcom from the exercise.

“We estimate that Digi’s forecasted financial year ending 2022 earnings per share will increase by 5%, while Axiata will decrease by 10% as Digi’s equity appears to be valued 67% above Celcom’s from the share and cash exchange,” said Goh.

The investment bank maintained an ‘Overweight’ call on the telecommunications sector with a ‘Buy’ call on Telekom Malaysia Bhd and Axiata.

“While retaining our ‘Hold’ call on Digi for now, we expect to upgrade to a ‘Buy’ should the parties complete the value-accretive agreement.

“Maxis Bhd remains a ‘Hold’ given the consolidation of its rivals will erode its current pole position,” he explained.

Hong Leong Investment Bank Bhd (HLIB) analyst Tan J Young said market consolidation usually leads to healthier market rivalry, less price undercutting for market share, improved operational leverage, effective capex spending (no duplication) and more procurement bargaining power.

“The MergeCo will be the largest telco with revenue and subs market share of circa 34% and more than 40% respectively.

“The companies believe this is an addressable issue by taking into consideration over-the-top market share,” he said in a note.

Although MergeCo will have the largest airwave holdings, J Young does not think this will attract any concern due to its large subscriber base.

He does not discount the possibility that MergeCo will consolidate its towers by maximising the usage of Digi towers, thus reducing its tower rental from edotco Group Sdn Bhd.

HLIB maintained its ‘Neutral’ call on the telco sector and reiterated its emphasis on fixed over mobile as they are the prime beneficiaries in broadband or 5G infrastructure deployment. It has ‘Hold’ calls on Axiata and Digi.