KUALA LUMPUR: Will the merger succeed this time? What is the value of the merged company?
As Digi.com Bhd shares surged last Friday, a day after investors digested Axiata Group Bhd and Norwegian telco giant Telenor ASA's announcement of making another go at merging their operations, there seems to be no deja vu of their failed merger two years ago.
Analysts said unlike the failed attempt to merge the Asian operations of Axiata and Telenor in 2019, there was greater likelihood that this time the planned merger, albeit in a reduced scale, would go through.
Axiata and Telenor last Thursday said they were in advanced discussions on the merger of the telco operations of unlisted Celcom Axiata Bhd and Digi.
Celcom Axiata is wholly-owned subsidiary of Axiata, while Digi is 49 per cent-owned by Telenor.
Digi saw its share soared nearly 20 per cent or 71 sen to close at RM4.46 last Friday, while Axiata added 8.16 per cent or 31 sen to RM4.11, helping telecommunications to be Bursa Malaysia's most gained index.
Affin Hwang Capital sees a high likelihood for this merger to materialise considering the key terms had been agreed upon and that the merger was of smaller scale and less complex now.
Both parties had also gained experience from the prior attempt and were better prepared prior to these announcements, Affin Hwang said, adding that both Telenor Asia and Axiata had similar preference for a high dividend payout.
Kenanga Research said compared to the 2019 attempt, there was greater incentive for Axiata and Telenor to merge this time, given the special purpose vehicle ownership via Digital Nasional Bhd of the 5G spectrum to allow more space to compete in 5G offerings.
There were also no cross-border complications and the fact that the groups had agreed on a shareholder structure versus 2019 when deal fell apart partially due to disagreement in equity stake, the firm added.
"That said, we believe that a potential deal breaker could be the lack of synergies, as had initially expected," Kenanga Research said.
Affin Hwang valued the merged company, to be known as Celcom Digi Bhd, at RM53.6 billion.
This was based on a target 2021 enterprise value versus earnings before interest, taxation, depreciation and amortisation (EV/Ebitda) of 12 times, which is below Digi's nine-year average EV/Ebitda to reflect the current business conditions and assuming no synergy from the merger.
The merger values Digi's share at 11.7 times Affin Hwang's 2021 EV/Ebitda, which is set at a premium to Axiata's nine times 2021 EV/Ebitda.
In their announcement last Thursday, Axiata and Telenor said they would have equal ownership estimated at 33.1 per cent each in the merged entity.
As part of the transaction, Axiata would receive newly-issued shares in Digi representing 33.1 per cent post-transaction shareholding and cash equalisation of around RM2 billion, of which RM1.7 billion to come from Digi as new debt and the balance RM300 million from Telenor.
Celcom Digi will continue to be listed on Bursa Malaysia.
Despite its optimism of the deal happening, Affin Hwang said securing regulatory approval could be a hurdle.
"The merged entity would have 44 per cent share of Malaysia's cellular market share and hence, securing regulatory approval could be a hurdle.
"Nonetheless, both managements from Axiata and Telenor have argued that if we were to include the fixed line/fixed broadband providers and the OTT (over-the-top) players (i.e WhatsApp, Skype), Celcom Digi's market share in the telecommunication space is not dominant, with which we concur," the firm added.
Kenanga Research does not think there would be an antitrust hurdle.
"By considering the additional competitive threats that OTTs such as WhatsApp pose to mobile number operators' traditional call and SMS revenue streams, (Celcom Digi) is not in a position with an excessive amount of market share. Thus, we do not believe that there will be any antitrust hurdles to the deal."
The firm believes Celcom Digi's leaner cost structure and thus "better" product pricing could spell potential downward pressure on product prices, potentially posing a threat to Maxis Bhd's.
"But we do not see this as an immediate threat yet as executing on a leaner cost structure, is likely to be realised over a longer term, mindful that right-sizing of workforce would need to be managed carefully," it added.