KUALA LUMPUR (July 27): Axiata Group Bhd will record a non-cash financial loss of RM1.5 billion to RM3 billion following the approval by the Department of Telecommunications (DoT) of India on the merger between India Cellular Ltd (Idea), Vodafone India Ltd (Vodafone India) and Vodafone Mobile Services Ltd.

According to a filing with Bursa Malaysia today, it said the reclassification of Idea from associate to simple investment upon completion of the scheme is attributed to the dilution of Axiata's shareholding in the merged enlarged Idea-Vodafone entity from 16.33% to 8.17%, which will result in loss of certain shareholder's rights as provided under the subscription agreement dated June 25, 2008 between Axiata and Idea.

The estimated loss is expected to have a material impact on the financial quarter ended June 30 this year.

In a statement, Axiata also said the exercise does not have any impact on the group's underlying performance and cash position as it is purely a non-cash technical treatment.

Additionally, the classification also signifies that Idea's profit or losses will bear no further impact to the group's financials going forward.

"Since our initial investment in 2008, with Idea being a high performing asset in our portfolio, the group has gained from the high-growth years of the Indian industry and benefited from Idea's performance to become the third largest player from the fifth largest," Axiata president and group chief executive officer Tan Sri Jamaludin Ibrahim said.

He added it was arguably the best performer within the industry till 2016 when Reliance Jio Infocomm Ltd started to disrupt the entire market.

"Despite the dilution impact to Axiata, we recognise that consolidation is required to ensure a sustainable business in one of the world's fastest growing telecoms market. The merged entity will be the largest operator in India and one of the biggest in the world, and we are confident we will see a significant upside in valuation as synergies are realised," Jamaludin noted.

While he acknowledged that a reclassification required the group to register a one-off non-cash adjustment, it neither has an impact on its normalised earnings for the full year nor its cash position today or in the future.

"Likewise, this does not reflect the future value of the merged entity, especially given the potential benefits to be derived from the synergies of the two large companies and the consolidation of the industry. Effectively, this exercise is not reflective of Idea or Axiata's intrinsic value," he pointed out.

Moving forward, Axiata is in a better position to review and assess the value of its investment now that it is a pure financial investor in the largest player in the Indian market.

"At this point, we have a very strong cash position and therefore, have no immediate plans to divest or exit, as long as there [is] no better alternative use of funds that would provide better returns to our shareholders. We will obviously review our position from time to time," he noted.

Following the merger, Vodafone Idea Ltd (Vodafone Idea) will be the largest telecommunications company to compete in one of the world's fastest growing market.

"Together, Vodafone Idea will serve a customer base of 440 million, representing 39% of the total market share while its revenue market share is estimated to be at 37.5%. Its revenue is forecasted to be in excess of US$10 billion. The merger will strengthen Vodafone Idea's position to compete effectively in a now mainly three player market with immediate synergistic benefits to be realized from the best spectrum position and other operational efficiencies," the statement noted.

At its close, Axiata's share price gained 1.41% or 6 sen to RM4.33 with about 4.74 million shares traded, giving it a market capitalisation of RM39.3 billion.