Sources say both companies have already hired advisors to work on the deal
A MERGER between Telekom Malaysia Bhd (TM) and Axiata Group Bhd is on the cards, sources say, as a means to strengthen the former in an increasingly converged market.
Sources say that both companies have already hired advisors, with CIMB Investment Bank advising TM while Goldman Sachs is working for Axiata on the deal.
Malaysia has three large mobile operators and a string of smaller ones. Fierce competition and stagnant growth is putting pressure on players to consolidate.
A merger between TM and Axiata would be an obvious choice.
For one, both are sister companies in the stable of Khazanah Nasional Bhd, which owns 26.2% of TM and 37.6% of Axiata.
For another, Axiata was previously a unit of TM, handling its international business.
Finding synergies therefore would not be too complicated.
Axiata was spun off from TM in 2008 in a move that is largely seen as a successful one.
TM would focus on growing its domestic fixed line business and appeal to risk-averse investors looking for yield.
Axiata, which has its hand in just about every emerging market this side of the world, would be nicely poised to attract investors looking for that kind of growth story. The plan has nicely worked out thus far so why the idea of reversing that exercise?
This isn’t the first time of talk of a remarriage between TM and Axiata, the idea has been bandied about since last year, especially after TM entered the mobile space with WeBe (formerly P1).
From a valuation standpoint, the deal would be dilutive to TM considering that its market capitalisation is half that of Axiata’s.
But here’s the reason why this merger makes some sense.
While TM is by far the most dominant player in the fixed line and broadband market with more than 90% of the share, Axiata’s key asset Celcom is the third largest mobile operator in terms of number of subscribers in Malaysia.
Working together, the two could be an even more formidable force in an increasingly competitive market.
The merger plans come amidst rumours that Datuk Seri Shazalli Ramly, who is best known for his 11-year stint as the head honcho of Celcom Axiata Bhd, is said to be the frontrunner to take over the helm at TM.
TM’s current CEO and managing director Tan Sri Zamzamzairani Mohd Isa, 55, who has led the firm since 2008, is said to be leaving the top position this month.
It is unclear if the merger plans are linked to plans for a changing of guard at TM.
On the rationale of the merger, it is understood that this is part of a strategy to ensure that both TM and Celcom compete better in the crowded industry.
“Market dynamics have changed and are continuing to evolve. Fibre networks coupled with wireless strategies are the way to go,” explains an investment banker.
Interestingly, that is the route that TM had earlier embarked on when it forked out RM350mil back in 2014 to buy partial stake in wireless mobile operator Packet One Networks (M) Sdn Bhd (P1) from Green Packet Bhd.
It now holds about 73% stake in P1, which has since been renamed WeBe, its own mobile service, that offers customers unlimited data plans.
TM is now offering a full suite of services to its 2.66 million household customer base.
However to date only around 2% of its customer base are WeBe users. TM is targeting to increase it to 8%-10%.
On top paying for its stake in Webe, TM had has earmarked a capex allocation of RM1.6bil over the next couple of years for WeBe expansion.
TM is taking more efforts to bring WeBe to the market.
It just said that it is looking to tap into the small and medium (SMEs) segment by introducing tailor-made packages slated to be launched on April 11.
The question is will TM be able to make it, with WeBe alone as its mobile strategy?
One industry expert points out an interesting fact -- that TM market capitalisation of RM23.7bil is around half of the other major telcos, namely DiGi.Com Bhd (RM40bil) and Maxis Bhd (RM47.5bil).
“Due to convergence, all these players are today fighting for the customer.
“So even though TM is a fixed line operator, DiGi and Maxis are also offering similar services.
“This indicates that TM is a smaller competitor. Size does matter in this industry, hence the argument that TM could do with combining forces with Celcom,” he explains.
But is there another way to achieve this?
For example, why can’t TM and Celcom enter into an extensive and tight collaboration agreement, to derive synergies from each other. Why does there need to be an ownership change?
Notably, in 2015, Celcom had entered into a three party agreement with TM and P1 to pave the way for fixed-mobile convergence.
The agreement inked with TM was aimed at accelerating the “fiberisation” rollout of Celcom’s 4G network with the provisioning of an extensive and robust backhaul with high bandwidth capacity, Axiata had said.
The second part of the agreement involved Celcom providing domestic roaming access to P1.
“These collaborations fit well into our strategy for Celcom to expand its mobile proposition and data leadership.
“With High Speed Broadband (HSBB) access, Celcom can now deliver services that are truly converged to create a new revenue stream for itself,” Axiata had said.
But agreements like this do not necessarily bring about the desired results.
This is what forces companies to embark on mergers and acquisitions as ownership changes tend to bring about quicker and more effective operational changes, at least theoretically.
Merging would be a costly exercise though. Furthermore, if TM actually only needs Celcom, should it buy out Celcom only?
That’s a complex deal, considering Axiata’s valuation today is twice that of TM and Celcom is the main earnings contributor of Axiata. That deal is not going to cost TM little money.
And how would that benefit Axiata, which relies on the cash flows from Celcom to grow its other markets?