Investors seem to like the idea of the merger, especially with the changing landscape of the telecommunications industry where players are losing revenue to the over-the-top (OTT) service providers such as instant messaging service WhatsApp and online TV Netflix.
On Thursday, Axiata’s wholly owned unit Celcom and Norway-based Telenor’s 49% unit Digi announced their plan to merge to become the country’s largest telco provider Celcom Digi Bhd (CDB).
Analysts are mainly positive on the proposed merger for the long-term sustainability of the telco industry and expect it to be completed in 2022.
Interestingly, while the merger would see both Axiata and Telenor having equal stakes of 33.1% each in CDB, AmInvestment Bank Research (AmInvest) reckons that Digi could benefit more than Celcom from the exercise.
“Assuming no synergies from the merger, we estimate that Digi’s forecast financial year 2022 (FY22) earnings per share will increase by 5%, while Axiata’s will decrease by 10% as Digi’s equity appears to be valued 67% above Celcom’s from the share and cash exchange. Hence, we view that the merger appears to favour Digi more than Axiata, ” it says in a report.
While both parties are still negotiating on the merger arrangement, AmInvest expects that the exercise could involve Digi acquiring Axiata’s wholly owned Celcom via a share swap together with RM2bil in cash, of which RM1.7bil will come from new Digi debt and RM300mil from Telenor.
Both Axiata and Telenor will have equal stakes of 33.1% in the merged entity, with the balance being held by Digi’s minority shareholders.
PublicInvestment says that the merged entity would have synergies in terms of the sharing of resources, network optimisation and lower procurement cost.
“Given the trend where the industry is experiencing margin compression and lower profitability with the need to continuously invest in new technologies to cater to a growing demand for data and speed, the merger should help to ensure long-term sustainability, ” it says.
It estimates that CDB’s market capitalisation could range between RM48bil and RM54bil, based on a combined net profit of RM2bil after debt.
“Our preliminary estimates indicate that Digi’s assets are being given a higher valuation compared to Celcom’s.
“Nevertheless, Axiata is expected to recognise a gain on disposal post-merger exercise, ” it says in a note to clients.
However, while the merger is a boon for both Celcom and Digi, some analysts have raised the issue of obtaining government approval, as the merger could see market domination and curb competition.
According to JF Apex Securities, Celcom and Digi would have a combined market share of 67% of mobile subscribers and 58% of revenue.
“We are concerned about obtaining government approval as the Malaysian Communications and Multimedia Commission (MCMC) will decide whether Celcom and Digi’s merger would curtail competition based on its Guideline on Substantial Lessening of Competition 2014, ” it adds.
On the contrary, Kenanga Research points out that telcos are also facing “competitive threats” from OTT providers such as WhatsApp to their traditional calls and SMS revenue.
“Thus, we do not believe that there will be any antitrust hurdles to the deal, ” it says.
“In our view, we believe that the merger is motivated by stiffening competition in the Malaysian mobile space and strategic knowledge-sharing and cost-savings to pave the way for a more sustainable future.
“Should the merger go through, we believe that having one less competitor allows operators to better compete in more sustainable ways via evolving cost efficiencies, and therefore, we are positive on the eventuality of a successful deal, ” Kenanga adds.
It says that CDB would become the largest Malaysian telco with a pro forma revenue of RM12.4bil compared to the RM9bil of Maxis Bhd.
AmInvest says that CDB will emerge as the leading telecommunications service provider in Malaysia in terms of market capitalisation, revenue and profits, with a pro forma FY20 revenue of RM12.4bil, earnings before interest, taxes, depreciation and amortisation or ebitda of RM5.7bil and 19 million customers, 71% above Maxis, the current market leader.
“Even so, the parties highlighted that this development will not lead to the market being dominated by a single party, which we understand is a concern for MCMC, ” it adds.
While creating a behemoth telco could benefit both Digi and Celcom in the long run, especially with the upcoming 5G connectivity, there are concerns on the network quality due to less competition in the market.
Recall, in July 2020, about five local telcos including Maxis, Digi and Celcom were slapped with RM4.6mil fines for offering service below the standard outlined by MCMC.
The question is, how many big players are needed for healthy competition in a telecoms market? With the merger, there will only be the top two main telcos in Malaysia.
In the United States, there are only three major telcos from four previously after the proposed merger worth US$26bil (RM107bil) between T-Mobile and Sprint was approved in April last year following two years of negotiations.
The chairman of the Federal Communications Commission, Ajit Pai, believes that the deal will promote – rather than damage – market competition.
“Should the merger go through, we believe that having one less competitor allows operators to better compete in more sustainable ways via evolving cost efficiencies, and therefore, we are positive on the eventuality of a successful deal.”Kenanga Research