Just be open minded of the final telco merger outcome

AT one end, the proposed merger of telco operators Celcom and Digi will bring a positive outcome for the telecommunications industry as consolidation should ease competitive pressures within Malaysia’s mature mobile market.

On the other hand, as highlighted by TA Securities Research, there is no certainty that the discussions between Axiata Group Bhd (Celcom) and Telenor Group (Digi) will result in any binding agreement or obligations on the parties to proceed with any acquisition, merger or divestment.

“As it is, both parties are conducting due diligence and negotiations on definitive agreements with the signing of definitive agreements expected within 2Q 2021,” wrote analyst Wilson Loo in a telecommunications sector update.

“Thereafter, they will be working on fulfilling conditions (eg board, shareholder, regulatory approvals) towards year end prior to completion of the merger. Until then, it will be business as usual for Celcom and Digi.”

Yesterday, both Axiata and Telenor announced that they are in advanced discussions to merge their telco operations in Malaysia. The merged company will be named Celcom Digi Bhd (MergedCo) and both Axiata and Telenor will have equal ownership of 33.1% each.

Between Axiata and Digi, the research house reckoned that shareholders of Digi are clearer beneficiaries of the proposed merger as the value accretion from synergies would be more direct.

“That said, for shareholders of Axiata, apart from the potential for value accretion and dividend upside via MergedCo, we view that they would also stand to benefit from the establishment of market valuation for its Malaysian operations via the MergedCo,” Loo pointed out.

All-in, TA Securities Research maintained its “overweight” stance on the telecommunications sector with unchanged earnings estimates.

The research house has “buy” rating on Axiata (target price: RM4.63), Digi.Com Bhd (TP: RM4.10), Maxis Bhd (TP: RM5.12) and Telekom Malaysia Bhd (TP: RM6.80).

Meanwhile, JF Apex Securities Research expressed concern about obtaining government approval as the Malaysian Communications and Multimedia Commission (MCMC) will decide whether the Celcom-Digi merger would curtail competition based on its Guideline on Substantial Lessening of Competition 2014.

“In the previous merger talks in 2019, Axiata’s management noted that the merged company will only hold 35% revenue share of the larger converged telco market which includes broadband players like Telekom Malaysia and TIME dotCom Bhd,” opined the research house.

“(Nevertheless), we are positive on the deal as the enlarged entity would increase market dominance and larger cash flow from cost savings through lower capex and combined procurement.”

Maintaining its “market weight” outlook on the telecommunications sector, JF Apex Securities is keeping its recommendations on Axiata (|buy; TP: RM4.53) and Digi (“buy”, TP: RM4.23) until further notice.

Operation-wise, the Celcom-Digi merger would result in Malaysia’s largest telecommunications company with combined subscribers of 19 million, revenue of RM12.4 bil and EBITDA (earnings before interest, taxes, depreciation, and amortization) of RM5.7 bil based on 2020 numbers.

Among the top three mobile operators, Celcom and Digi would have a combined market share of 67% of mobile subscribers and 58% of revenue.

At 9.22am, Axiata was up 32 sen or 8.42% to RM4.12 with 8.89 million shares traded while Digi was up 37 sen or 9.87% to RM4.12 with 16.86 million shares exchanged hands. – April 9, 2021

Subscribe and get top news delivered to your Inbox everyday for FREE