Friday, December 13

Back to square one for Axiata, Digi

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KUCHING: Though neutral on the move, analysts welcomed the cancellation of the merger between Axiata Group Bhd (Axiata) and Telenor Asia, which has a 49 per cent equity stake in Digi.Com.

The two telco giants on September 6, 2019 had mutually agreed to end discussions for a merger of their telecommunications and infrastructural assets in Asia after four months of due diligence and finalising the transaction details.

MIDF Amanah Investment Bank Bhd (MIDF Research) said the merger would have created the largest telco in terms of revenue market share.

“Given the size advantage, we view that it would create more pressure on its peers to retain their respective market competitiveness,” it noted in its notes yesterday.

“Meanwhile, for the consumer, it would simply means less one service provider to choose from. In addition, the existing customer of Celcom and Digi could possibly have their service contracts revised. Thus, with the fallout of the deal, we view that there will be no major change in market dynamics.

“The termination of the deal would mean that the existing market dynamics will remain. Competition expected to be prevalent given that mobile-cellular penetration is high at 131.4 per cent.”

MIDF Research said mobile service providers would need to continue to provide attraction service value proposition to retain their respective market share, translating to dilution in profit margin.

“Thus, having effective cost management strategy in place is essential to defend the profit margin. Notably, Telekom Malaysia Bhd has shown drastic reduction in operating cost in recent quarters. With the upcoming National Fiberisation and Connectivity Plan (NFCP), we view that mobile service providers would need to be more aggressive in its cost optimisation initiatives to maintain a healthy cashflow.

“As we do not foresee any positive significant catalyst in the telecommunication industry, we are maintaining our neutral recommendation on the sector. Moreover, with the fallout of the deal, we do not expect much excitement for the sector in the near term.”

Although Axiata’s management declined to comment further on the nature of the complexities, Kenanga Investment Bank Bhd (Kenanga Research) suspected it could have been an accumulation of issues.

These include complications in spectrum allocation given that an enlarged share of licenses by the MergeCo from Celcom and Digi which could raise competitive imbalances; and potential loss of jobs in the long-term possibly arising from the moving of operations outside of Malaysia and voluntary separation being a likely approach to trim staff redundancies as the consolidated organisation becomes more efficient.

“Although the merger plan with Telenor has come to a close, management did not discount the possibility of consolidating with other regional players in the market, should there be opportunities, which make business sense,” it highlighted yesterday.

“In fact, Hong Kong’s conglomerate, CK Hutchinson Holdings Ltd reportedly expressed interest for a tie-in with XL Axiata, though as an informal remark at this juncture.”

It was back to the drawing board for Axiata, said AmInvestment Bank Bhd (AmInvestment Bank), as the domestic telco aims to continue focusing on profit growth versus acquisition of revenue market share, and maintain strict costs discipline with a five-year target to secure opex and capex reductions of RM5 billion.

The group plans to reprioritise investments with long payback period, fund new growth investments via strategic partnerships and monetise existing investments such as tower company, edotco, which had been planning for an IPO earlier this year.

“While the group claims that it is still looking to accelerate structural changes via industry consolidation, management says Axiata is currently not revisiting a potential merger with TM,” AmInvestment Bank said in separate notes. “Axiata is currently exploring partners other than TM in rolling out its fibre broadband services.

“As we were earlier positive on this deal, its termination consequently means the reversion to the previous state of intense mobile domestic competition between the 5 existing players – Maxis, Celcom, Digi, U Mobile and Unifi Mobile, excluding mobile virtual network operators (MVNOs) such as REDtone, which are currently offering highly attractive postpaid plans.

“Now that Celcom and Digi will no longer be impeded by merger preoccupations over the next two years, Maxis may no longer have as much of a free hand to pursue its converged fiberised solutions for its consumer, enterprise and business segments.”

Given that mobile competition will remain just as intense as over the past four years, AmInvestment Bank went on to expect continuing pressure on average revenue per unit and subscriber trajectory, even though 2Q2019 subscribers have recently flipped to a net sequential accretion of 77,000 after four years of continuous contractions.