This article first appeared in The Edge Malaysia Weekly on September 11, 2017 - September 17, 2017

AFTER closing its biggest deal to date, Axiata Group Bhd’s 62.4%-owned telecommunications infrastructure arm, edotco Group Sdn Bhd, will take a breather on acquisitions and focus on integrating the acquired operations in Pakistan with its existing infrastructure this year.

“While we still have funds available [for more acquisitions], our priority at this stage is to complete the Pakistan deal and enable its integration with our existing operations. But it’s still a subject of balance if an interesting opportunity arises — whether we have enough resources to execute it, in addition to the latest acquisition in Pakistan,” edotco CEO Suresh Sidhu tells The Edge.

Last month, the company announced that it was buying Deodar (Private) Ltd, which owns 13,000 telecom towers in Pakistan from Pakistan Mobile Communications Ltd (PMCL) for US$940 million or about RM4 billion. The proposed deal will be funded through a debt of US$600 million and equity funding from edotco (US$174 million) and Pakistan conglomerate Dawood Hercules Corp Ltd (US$166 million).

The transaction is expected to be completed by year end.

The proposed acquisition will add to edotco’s current portfolio of 26,319 towers across six countries as at June 30, making it the world’s eighth largest telecom tower company after Germany’s Deutsche Funkturm GmbH, which has 32,000 towers under its portfolio.

China Tower Corp Ltd is the world’s largest with 1.7 million towers, followed by American Tower Co, with 150,000 towers.

“Firstly, we need to make sure it (the Pakistan operations) runs like edotco. We believe in good technical processes and strong governance. So, we have to adopt and integrate these with the operations in Pakistan,” Suresh explains.

“Secondly, when we take over someone’s tower assets, we will spend a bit of time cleaning up, identifying issues, converting it from an in-house type of operation to an external type of operation … things like these need a little bit of time to implement.”

Apart from maintaining the asset quality, Suresh says it is equally important to change the mindset of the current management in Deodar from one that views telecom towers as a cost centre to one that treats them as a revenue centre.

“When you look at it as a revenue opportunity, you will tend to have a more positive view of an asset. But when you take a cost-centric view, you may minimise and even underspend what is needed at an individual location,” he adds.

While edotco still has funds left from its previous fundraising exercise, Suresh believes there is unlikely to be any new announcement that shares the same level of excitement as the Pakistan deal.

“I doubt that we will have anything quite as exciting as this deal this year, but like I always say, you never know,” he says.

Earlier this year, edotco undertook a private placement to raise US$400 million from Innovation Network Corp of Japan and US$100 million from Kumpulan Wang Persaraan (Diperbadankan) (KWAP).

“We raised US$500 million. Out of that, we paid off shareholder loans of US$125 million, leaving us with just under US$400 million,” says Suresh.

A back-of-the-envelope calculation shows that edotco is left with about US$111 million of proceeds from the private placement after subtracting US$125 million for shareholder loans, US$90 million for the acquisition consideration of another smaller telecom tower business in Pakistan called Tanzanite Tower Pte Ltd in June, and US$174 million for Deodar.

“We intend to build a more optimum capital structure. We have been frequently asked about our IPO (initial public offering) plans and what conditions we need to go for IPO. I think one of the key things is to build a less lazy balance sheet,” remarks Suresh.

“When we are comfortable that we have more debt raised, then that would be one of the potential triggers for doing an IPO.”

He says edotco’s gearing ratio is currently “nowhere near” the industry’s range of 3.5 times to 5 times earnings before interest, taxes, depreciation and amortisation (Ebitda).

“Personally, and I stress personally, I think in a market like Asia, you probably want to keep things around the 3.5 times Ebitda mark.

“But on a country-by-country basis, you may have a different answer. In a country where you have more US dollar-denominated contracts, with a clearer, longer and more enforceable contract, you could take on more debt and raise beyond 3.5 times Ebitda,” he explains.

“I think Asia is still a market where even if people want to lend you money, you have to think [about the] fundamental inherent risks of your business model.”

As a privately held company, edotco is not required to publicly disclose its financial statements.

Based on data obtained from the Companies Commission of Malaysia, edotco recorded a net profit of RM62.43 million in the financial year ended Dec 31, 2015 (FY2015) compared with a net loss of RM27.16 million in FY2014. Revenue stood at RM91.07 million, which was five times higher than FY2014’s RM17.2 million.

Suresh says it is part of the company’s agenda to disclose its financial performance. “Some of the overseas operations still stand alone from edotco. There is a bit of accounting work to be done in the next few months so that we can consolidate completely on our side. But it is part of our agenda to reveal edotco’s financial performance within this year or early next year.”

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