XL Axiata-Smartfren merger to yield synergy

RHB Research said a consolidation will result in a healthier market conduct.

PETALING JAYA: The proposed merger between Axiata Group Bhd’s 66.3%-owned XL Axiata and Indonesia’s Smartfren could see improved economies of scale, operational synergies, reduced competition and capital expenditure savings from an enlarged spectrum.

The potential merger of the two Indonesian mobile businesses has been talked about for sometime now.

On Wednesday, Axiata Group and Smartfren’s parent company PT Sinar Mas Group announced that they have officially signed a non-binding memorandum of understanding (MoU) to explore this.

RHB Research said a consolidation will result in a healthier market conduct, although clear articulation of the rationale and synergies are required to drive value accretion given Smartfren’s weaker franchise.

Smartfren is Indonesia’s smallest mobile operator.

The research firm notes that Axiata is no stranger to in-country consolidation, having executed mergers in Sri Lanka (which is ongoing), Bangladesh, Cambodia, and Malaysia.

“If the Smartfren deal materialises, it would be XL Axiata’s second mobile merger following the acquisition of Axis Indonesia a decade ago.

“While we acknowledge the deal’s strategic intent, we believe the key focus should be establishing a strong transaction rationale.“Investor concerns are likely to be on the potential merger synergies, as Smartfren lacks scale and commands among the market’s lowest average revenue per user,” the research firm said in a note to clients.

Based on proforma numbers and in the absence of synergies, it said the merger will be earnings dilutive in the medium-term as Smartfen is loss-making.

On the other hand, it would narrow XL Axiata’s revenue and subscriber market share gap from a distant third place to about 27% and 24%, respectively.

In comparison, the second-largest operator, Indosat commands about 28% revenue and subscribers share.

Additionally, the telco will have access to valuable spectrum.

XL Axiata currently owns 90 megahertz (MHz) of paired spectrum in the 900/1800/2100MHz frequencies, while Smartfren has 62MHz.

“We gather from industry sources that the government may allow for spectrum retention in exchange for an undertaking by the merged entity to expand coverage in rural areas and outside Java.

“If XL Axiata gets to keep Smartfen’s spectrum, it would own a combined 34% of the overall spectrum, narrowing the gap with Telkomsel and Indosat, which collectively hold 66% of assigned spectrum rights,” said RHB Research.

Meanwhile, Kenanga Research believes Smartfren may turn around post-merger.It estimated that Smartfren delivered core net loss of RM262.7mil in the financial year 2023 (FY23), while XL Axiata reported normalised profit after tax and minority interest of RM172mil.

“Although Smartfren was loss-making in FY23, we do not discount the possibility of a turnaround after post-merger accounting adjustments and cost synergies.

“It currently trades at trailing 8.9 times on the Indonesian Stock Exchange, said Kenanga Research, which has a RM3 target price on Axiata Group.

RHB Research is slightly more bullish with a RM3.40 target price, saying it “liked Axiata for its earnings recovery and balance sheet deleveraging thesis”.