Greater clarity on local telecoms scene should emerge by early July

TheEdge Tue, Apr 27, 2021 04:00pm - 2 years View Original


TENDER documents for foreign vendors to bid for Malaysia’s single government-owned 5G network infrastructure rollout was issued just hours ahead of Axiata Group Bhd and Telenor Group’s surprise April 8 announcement of their intent to merge the mobile operations of Celcom and Digi.com Bhd to become the country’s leading digital telecoms champion in terms of revenue, earnings and customer base. These two seemingly unrelated events may spark more deal-making in the highly competitive industry.

Just as Axiata and Telenor intend to move from “advanced discussions” to finalising agreements in the second quarter of 2021 following due diligence, it is understood that Digital Nasional Bhd (DNB) — the Ministry of Finance-controlled 5G special-purpose vehicle (SPV) — also aims to award the 5G tender to “one or two vendors” by end-June or latest in early July.

“Rollout should begin by July to have commercial services by year-end in Putrajaya, Cyberjaya and some parts of Kuala Lumpur,” a source tells The Edge, adding that the 5G network will be progressively extended to major cities, industrial areas and logistic hubs that already have fibre infrastructure and are most likely to house entities and enterprises that will benefit from advanced 5G solutions such as smart manufacturing, robotics, artificial intelligence (AI) and the internet of things (IoT). “Industrial parks such as Bayan Lepas and Shah Alam come to mind,” the source adds.

While two vendors are likely to be selected so as not to be held ransom by one vendor over the long haul, it is understood that there is a chance a single vendor will be selected if the value proposition submitted by the vendor far outweighs the potential downside of reliance on a single infrastructure vendor for 5G.

The government had previously said the private sector would invest up to RM15 billion over 10 years in 5G infrastructure, which implies some form of vendor/project financing with limited capital commitment from the government.

It is understood that telecoms operators such as Maxis Bhd, Celcom, Digi and U Mobile would also need to indicate their financial commitment to the single shared 5G network infrastructure under DNB, which will be the only party to be given 5G spectrum in Malaysia.

None of the existing spectrum that has been granted to mobile operators can be used for 5G rollout, the Malaysian Communications and Multimedia Commission (MCMC) has said. This is despite the fact that the non-standalone (NSA) 5G network expected to be deployed first in Malaysia by year-end will use the existing 4G network infrastructure before the standalone (SA), or “true”, 5G network is deployed.

Precursor to more deals?

Between now and early July, investors interested in the local telecoms industry will be watching out for news on whether the Celcom-Digi merger will indeed go through this time.

Eyes will also be peeled to see whether Maxis will merge or form stronger collaborative ties with U Mobile or another player in the telecoms-media-technology (TMT) universe to gain stronger financial positioning, if not retain the dominant position that a merged Celcom-Digi entity stands to gain even though both brands will be retained post-merger.

Digi’s and Celcom’s 900MHz, 1800MHz (valid through June 30, 2032) and most of their 2100MHz (valid through April 1, 2034) spectrum bands are adjacent to each other, which makes it easier for network planning. The same could be said for Maxis and U Mobile, data from MCMC’s website shows.

It is understood that the proposed deal involves Digi buying Celcom from Axiata in return for new shares in Digi representing a 33.1% stake as well as RM2 billion cash equalisation amount, of which RM1.7 billion will come from Digi, which is taking new debt, while the remaining RM300 million cash will be from Telenor.

At a press conference on April 8, Axiata group CEO Datuk Izzaddin Idris neither confirmed nor denied whether Digi would be buying Celcom but confirmed that both Axiata and Digi would remain listed separately, with the enlarged merged entity expected to take over the listing status of Digi with the name Celcom Digi Bhd.

The merged Celcom-Digi is expected to have a market capitalisation of about RM50 billion, given that Axiata and Telenor expect the merged entity to be among Malaysia’s top five largest listed companies. IHH Healthcare Bhd, with a RM47.3 billion market cap was the fifth-largest listed company on Bursa Malaysia at the time of writing, behind Malayan Banking Bhd (RM95 billion), Public Bank Bhd (RM82.1 billion), Petronas Chemicals Group Bhd (RM63 billion) and Tenaga Nasional Bhd (RM58.2 billion).

Maxis (RM36.8 billion), Axiata (RM35.5 billion) and Digi (RM33.7 billion) were Nos 10, 11 and 12 respectively in terms of market cap at the time of writing.

Axiata provided no indication of where it expects its market cap to be after spinning off Celcom, which it currently wholly owns, in return for a 33.1% stake in the enlarged Celcom-Digi and RM2 billion cash, 85% of which is to be borne by a new associate company it jointly controls with Telenor.

Telenor, too, will see its 49%-owned subsidiary Digi becoming a 33.1%-owned associate, albeit one that is much larger and which will have a more dominant market positioning.

Both Axiata and Telenor are expected to address questions surrounding dividend expectations of Celcom-Digi once a definitive agreement is sealed, given that each respective Malaysian subsidiary is a substantial contributor to group earnings as well as cash flow for dividends prior to the proposed merger.

Potential partner for edotco, XL?

The value of Digi’s telecoms towers is likely to be among key topics of interest among investors, given that Celcom has transferred most of its telecom towers to Axiata’s tower unit edotco Group Sdn Bhd. It remains to be seen whether the merged Celcom-Digi would choose to sell Digi’s telecoms towers to Axiata and rent them from edotco like Celcom does rather than decommissioning and redeploying duplicate towers post-merger.

Whether the merged entity will sell towers to Axiata’s edotco is not currently part of merger negotiations, a source says.

On April 8, when asked at a media briefing whether there were other negotiations with Telenor involving other Axiata units and operating companies apart from Celcom, Izzaddin, who will become chairman of Celcom Digi once the deal is sealed, told reporters that the only deal on the table at this juncture was the merger of Celcom and Digi.

It would also be interesting to see whether Telenor — which is “happy” to be “equal partners” with 33.1% ownership of the enlarged Celcom-Digi alongside Axiata — would proceed to also be an equal or significant partner when it comes to edotco, which Axiata wants to bulk up with more towers before putting it up for an initial public offering (IPO).

Norwegian Telenor is present in nine countries, serving 182 million subscribers across the Nordics and Asia. It is not immediately certain how many telecoms towers Telenor owns across Norway, Sweden, Denmark, Finland, Thailand, Pakistan, Myanmar and Bangladesh apart from at least 2,000 towers at Digi in Malaysia.

Axiata owns 63% of edotco, which has more than 32,000 towers across eight countries: Malaysia, Bangladesh, Cambodia, Sri Lanka, Myan­mar, Pakistan, Laos and the Philippines. Of those, about 22,000 towers are directly operated while the rest are managed.

European operators that are monetising their tower assets to fund network upgrades and pare debt include Vodafone Group plc, which reportedly made €2.3 billion (RM11.4 billion) in March from selling shares in its 81%-owned tower unit Vantage Towers AG, which operates 82,000 towers across 10 countries and counts Vodafone as its main client.

Asked whether Telenor was looking to reduce its exposure in Asia, Jorgen Rostrup, head of Telenor Asia who will be deputy chairman of Celcom Digi, had said the group remained committed to Malaysia and the region.

That Rostrup had described Axiata as a “like-minded” entity and touched on the importance of consolidation for long-term sustainability keeps the door open for further collaboration in other markets once the Celcom-Digi deal is done.

If indeed Telenor intends to remain in Asia, the closing of a Celcom-Digi merger could well pave the way for further deals with Axiata, whose current group CEO told The Edge — while he was deputy CEO, before taking over as CEO in January this year — that the group aims to pay at least 20 sen dividend per share (DPS) by 2024 or as early as 2023 — what it paid in 2015 and more than double the seven sen it paid in 2020.

Axiata is only expected to pay a DPS of between eight sen and 11 sen for FY2021, according to Bloomberg data at the time of writing.

Besides potentially building a large multi-region tower company with Axiata — something neither party mentioned on April 8 — Axiata, which is looking to consolidate and strengthen its position in Indonesia, may well welcome a like-minded financial partner such as Telenor, which currently has no operations in the populous archipelago.

While both Izzaddin and Rostrup would not say, despite repeat prodding, whether what broke the multi-country mega merger last time would also come in the way of the current Malaysia-only merger, at least two industry observers say the fact that the two parties are back at the negotiation table means the chances that the deal will go through “should be good enough” and/or the financial benefits of the merger are worth risking their reputation again.

While Axiata and Telenor have not spoken about potential synergies from the merger of the two Malaysian units, the audacious Axiata-Telenor Asia mega-merger, which fell through in 2019, has indicated potential savings “in the billions”, with half of the 70% potential synergies from network efficiencies to come from Malaysia even without layoffs.

The size of Axiata’s market cap after spinning off Celcom in return for 33.1% of an enlarged Celcom-Digi with RM2 billion cash — which is enough to pay a DPS of more than 20 sen for a year — is likely to be determined by just how confident investors will be of more value being unlocked at the group in the near to medium term.

Axiata’s 63% stake in edotco should be worth at least US$1.2 billion (RM4.95 billion), given that it had sold a 5.4% stake to Retirement Fund Inc (KWAP) for US$100 million in April 2017. It remains to be seen how the government’s decision to own the country’s only 5G network would affect edotco over the long term.

Izzaddin had previously said all Axiata operating units are financially independent and do not require large amounts of cash injection from the group. Axiata’s 66.48%-owned Indonesian unit PT XL Axiata Tbk and 61.82%-owned Bangladeshi unit Robi Axiata Ltd are already publicly listed in Jakarta and Dhaka and had a market cap of IDR22.2 trillion (RM6.3 billion) and BDT234.66 billion (RM11.4 billion) respectively at the time of writing.

Analysts are overwhelmingly positive on Axiata, with 14 “buy” recommendations versus seven “hold” calls, according to Bloomberg data at the time of writing. Their target prices range between Hong Leong Investment Bank Research’s RM3.76 and UOB Kay Hian Research’s RM4.70, with at least 11 analysts saying the shares are worth at least RM4.20 apiece — which implies at least 10% upside potential from last Friday’s (April 16) RM3.80 close, if these expectations are to be believed.

Analyst recommendations for Digi are less bullish, according to Bloomberg data at the time of writing. There were only five “buys” versus 13 “holds” and one “underperform” recommendation, with a target price of RM3.40 — significantly below the RM4.25 the stock closed at last Friday, which implies 3.5% yield, if the consensus DPS of 15 sen expected for FY2021 still applies after its merger with Celcom.

These analyst forecasts may well be subject to change once there is greater certainty on whether the proposed Celcom-Digi merger can close by year-end or early next year, but expectations are that the dividend policy at the enlarged entity should continue to be one that its major shareholders would continue to benefit from.

 

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