(Jan 24): This time, it might just work.

Telenor ASA and Axiata Group Bhd are back at the negotiating table. Joining forces in South and Southeast Asia still makes sense for both carriers. Options including a mooted minority investment from Norway’s US$27 billion telecoms heavyweight could be enough to get them started, with sales and spinoffs to follow.

Talks for a potential deal resumed just four months after the parties scrapped discussions to create a combined entity with some 300 million customers in the region, Elffie Chew and Manuel Baigorri of Bloomberg News reported last week, citing people familiar with the matter. This time they may start small, with Telenor buying part of the nearly 37% stake held by Axiata’s largest shareholder, Malaysian sovereign wealth fund Khazanah Nasional Bhd.

A partial deal isn’t the solution either carrier hoped for. It won’t bring any of the anticipated US$5 billion in cost synergies from the previous structure, or much-needed scale. But it might just be a necessary detour.

Last time, politics proved to be the undoing. Under the all-share combination laid out in May, Telenor would have held 56.5% of the combined entity. With most of the overlap in Malaysia and significant cuts planned, local politicians fretted over jobs. Telenor wasn’t paying a control premium either, some grumbled. Worse, Norway had months earlier banned imports of non-sustainable palm oil, hurting Southeast Asia’s exporters. Officials in Indonesia, a bigger market for Axiata than Malaysia in the third quarter, didn’t warm to the idea of government-controlled Telenor getting a foothold through the company.

None of the financial pressures that brought the two together have gone away.

Revenue is flatlining in Telenor’s home market, which it dominates, and in its Swedish fixed and mobile telecom operations. Growth is also stagnating in its Asian mobile businesses, which make up half the group’s revenue, especially in Malaysia and Thailand. Elsewhere, shrinking profit in Pakistan weighed on third-quarter earnings.

Axiata, meanwhile, needs to invest in 5G technology and in its ability to cater for booming data and video-streaming demand. Moreover, Prime Minister Tun Dr Mahathir Mohamad’s government has promised to reduce the role of the state in local business. Incumbent Telekom Malaysia Bhd, also part-owned by Khazanah, has been deemed strategic. Axiata hasn’t.

The question then becomes, how to get the deal done. For Telenor to buy a minority holding in Axiata, which has a market value of about US$9.5 billion, might just be a doable, if unorthodox, step to gain clout in the region.

Assuming it takes a 20% to 30% stake, Telenor would be tying up US$2 billion to US$3 billion of cash, presumably at a manageable annual funding cost. That’s a reasonable bet on an attractive future option, not least given Axiata trades at a slight discount, in terms of enterprise value to Ebitda, to peers like Malaysian tycoon T. Ananda Krishnan’s Maxis Communications Bhd. Telenor would be making a public commitment to the Malaysian government too, putting cash on the table as opposed to its stock swap proposal the last time. Such a deal would keep at bay rival bidders eyeing up Axiata’s component parts, arguably worth more than the whole.

The heavy role of state-linked government entities in Axiata should help eventual steps up, by simplifying the path to control. A slower pace might help get reluctant Indonesian officials onside, or exclude the business.

Even a less bullish scenario could still see Axiata hiving off parts of its business into ventures with Telenor — say, its towers business, Edotco.

The downside, of course, is that such partnerships often fall apart. Malaysia’s government is entering an uncertain period, with 94-year-old Dr Mahathir reluctantly preparing to hand over power to a successor. If it all goes wrong, Telenor would become a forced seller of a significant stake in a state shareholder-heavy Malaysian entity.

Ideally, Telenor wouldn’t proceed without, for example, an in-principle regulatory approval for it to eventually merge its wireless carrier, Digi, with Axiata’s Celcom.

Telenor can’t afford to stand still. Axiata offers a risky but salutary remedy.