Making the merger work


On Monday, Celcom and Digi’s parent companies – Axiata Group Bhd and Norway’s Telenor ASA – announced they signed a transaction agreement to create Celcom Digi Bhd (CDB).

PETALING JAYA: One of the biggest mergers in South-East Asia’s telecoms industry is in the works between Celcom Axiata Bhd and Digi.com Bhd. But will it really help spur more competition for better customer experience or stifle it since the enlarged entity will control nearly 50% of the mobile subscriber market share.

It leaves a large gap for others – in this case – Maxis Bhd and U Mobile, with only 28% and 19% market share respectively, to catch up. Celcom and Digi have 22% and 26% market share respectively.

Post merger, the number of players will be reduced to three from four. While analysts view this merger positively, there are some concerns raised in the industry over creating what they call a “dominant player’’ and what this means for competition, jobs, service levels, pricing and spectrum.

Any rise in the price of service or lack of competition will not bode well for the consumers, who are now more dependent on digital connectivity since the Covid-19 pandemic.

“It is not really about opposing consolidation but about creating a level playing field for all,’’ said an industry executive.

However, the promoters of the merger believe that consolidation creates stronger converged entities necessary for the digital shift and new technologies.

Consolidation is necessary with dwindling revenues and it is also a global trend, even though this merger could have been partly triggered by the lack of future 5G spectrum needed for growth.

On Monday, Celcom and Digi’s parent companies – Axiata Group Bhd and Norway’s Telenor ASA – announced they signed a transaction agreement to create Celcom Digi Bhd (CDB).

It was natural for the share price to inch upwards.

In yesterday’s trade, Axiata gained three sen to RM4.01 while Digi added 10 sen to RM4.42 a share.

“We are positive on the deal as the enlarged entity would increase market dominance and larger cash flow from cost savings through lower capital expenditure and combined procurement.

“However, we are concerned about obtaining government approval as MCMC (Malaysian Communications & Multimedia Commission) will decide whether Celcom and Digi’s merger would curtail competition based on its Guideline on Substantial Lessening of Competition 2014,’’ said JF Apex Research.

CDB will also end up with more spectrum when combined and currently six of the eight mobile virtual network operators (MVNOs) rely on Celcom and Digi for network access and in turn, these MVNOs have leased out their spectrum to the two, thereby giving CDB lots more spectrum versus others. Will there be a plan for spectrum surrender?

That aside, the cash-and-stock offer will create a RM50bil company and would be one of the top five listed on Bursa Malaysia, enjoy capital expenditure and operating expenditure savings of RM8bil over five years, serve 19 million customers, earn revenues of RM12.4bil, net profit of RM1.9bil, and have RM4bil free cash flow.

If all goes as planned, the deal would be expected to be completed by the middle of next year.

Upon completion of the proposed merger, Axiata and Telenor will end up with a 33.1% stake each in CDB.

Apart from that, the Employees Provident Fund will have 9.9%, Permodalan Nasional Bhd (7.1%) and KWAP (2.5%).

That brings the total institutional shareholding to 85.7%, and with that, Axiata will seek a waiver from the authorities from having to make a mandatory takeover offer.For Axiata, it is time to monetise Celcom, which is valued at RM17.8bil. Axiata will record a net disposable gain of RM13.2bil assuming the successful sale of Celcom.

“More importantly, the cash flow from CDB (assuming 100% dividend payout) will match Axiata’s ambition to payout about 20 sen dividend per share by 2024 (from seven sen in 2020).

This translates to an attractive net dividend yield of 5%, according to UOB Kay Hian.

“Post-merger, the consolidation of Celcom together with potential annual cost savings of RM500mil to RM1bil can lift Digi’s (CDB post-merger) 2023 earnings per share by 19% and 37% respectively from our estimate of 17.7 sen per share,’’ it sad.

RHB Research estimates financial year 2022 earnings accretion of 13% for Axiata.

“While there will not be forced retrenchments, some realigning of the workforce is to be expected, including potential severance packages, with the combined headcount at about 3,800.

“This excludes in-sourced Ericsson employees at Digi and 2,400 workers at Celcom,’’ RHB said.

The question remains, will the authorities allow such a merger to go through? This is the second attempt by the promoters to merge the units.

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