Axiata, Sinar Mas sign MoU to explore merger

The proposed merger is currently at its early stage of evaluation, with both Axiata and Sinar Mas intending to remain as joint controlling shareholders of MergeCo.

PETALING JAYA: Telecommunications giant Axiata Group Bhd has entered into a non-binding memorandum of understanding (MoU) with PT Sinar Mas to mutually explore a proposed merger of PT XL Axiata Tbk and PT Smartfren Telecom Tbk to create a new entity (MergeCo).

XL Axiata is Axiata’s largest asset within its Indonesian portfolio and is the third largest telecommunications company in the country with 58 million subscribers. Other main businesses under its Indonesian portfolio include Link Net, Edotco, Boost and ADA.

In a statement, Axiata said Sinar Mas consists of PT Wahana Inti Nusantara, PT Global Nusa Data and PT Bali Media Telekomunikasi.

“With the intent to create a stronger telecommunications service provider in Indonesia, the proposed merger of XL Axiata and Smartfren is expected to bring together the combined scale, competencies, finances and deep telecommunication expertise of Axiata and the local scale and market knowledge of Sinar Mas to generate significant value,” it said.

Axiata said both parties are expected to wield an equitable influence over the strategic direction and operational decisions of MergeCo, bolstered by their respective strengths.

Meanwhile, MergeCo is expected to deliver superior customer experience in the telecommunications sector as well as creating additional shareholder value via synergies from the combined operations of XL Axiata and Smartfren.

Axiata said it believes the new entity will have the strategic agility, competence and scale to meet the increasing expectations and demand from consumers, businesses as well as the Indonesian public.

The proposed merger is currently at its early stage of evaluation, with both Axiata and Sinar Mas intending to remain as joint controlling shareholders of MergeCo.

Axiata said there is no certainty that the ongoing discussions between the two parties will result in any binding agreement or the completion of the proposed merger.

“Any key development in relation to this MoU will be announced as required. In the event a binding agreement is to be entered into at a future point in time, the associated transaction will be subject to, among others, regulatory and corporate approvals,” it said.

Analysts, however, were not fond of the idea as recently in a report, MIDF Research stated that Axiata may face probability concerns from the potential merger.

It was noted that while XL Axiata has been profit-making, Smartfren has been in the red.

This was evident in Smartfren’s 2023 annual report, which showed that the group had suffered a net loss of 108.9 billion rupiah.

“This would potentially affect XL Axiata’s profitability, especially in the near term,” MIDF Research said.

It added that if the merger does take place, Smartfren’s subscribers of 36 million will be added but will not be sufficient to rival both the top telecommunication companies in the country – PT Telekomunikasi Selular and PT Indosat Tbk.

“While the transaction may strengthen XL Axiata’s subscriber market share, our immediate concern will be Smartfren’s loss-making position.

“Also, should the funding involve cash, it would further burden the group’s balance sheet,” MIDF Research added.

Axiata said Indonesia is an important market and key to its strategic initiatives and it is committed to remaining a leading player in Indonesia’s digital and technology landscape, rooted in its long-term vision of supporting the country’s digital future.

Axiata and Sinar Mas were noted to have been in discussion since 2021 and both parties were reported to have sought permission from the Indonesia government to merge their telecoms units, creating a US$3.5bil entity.

For the financial year ended Dec 31, 2023 (FY23), Axiata’s business in Indonesia posted a 12% year-on-year (y-o-y) growth to RM9.66bil in revenue, driven by higher prepaid data revenue, growth in digital advertising business as well as improved managed service revenue.

Its earnings before interest, taxes, depreciation and amortisation jumped 13.2% y-o-y to RM4,776.6mil, while profit after tax grew 15% y-o-y to RM392.2mil, attributable to higher top line and foreign exchange gains as opposed to the losses incurred in FY22.

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