This article first appeared in The Edge Financial Daily, on February 2, 2016.

Axiata Group Bhd
(Jan 29, RM5.61)
Maintain hold with an unchanged target price of RM6.60: Axiata Group Bhd’s (Axiata) 91.59%-owned Bangladeshi subsidiary Robi Axiata Ltd (Robi) is planning to merge with Airtel Bangladesh Ltd (Airtel) through an issuance of new shares.

The deal came after Axiata’s proposed acquisition of Ncell in Nepal last month. 

The proposed merger came after an agreement in September 2015 with Bharti Airtel Ltd (Bharti) to explore the possibility of a merger. 

The newly emerged company is expected to have an implied enterprise value of between RM7.86 billion and RM9.34 billion. 

The combined entity will create the widest mobile network in Bangladesh serving 40 million subscribers, consolidating Robi’s position as the second-largest mobile operator among six.  

The acquisition of Airtel is subject to approvals and is expected to be completed in the first half of 2016.

Upon completion, Axiata will hold 68.7% of the new combined entity, while Bharti will hold 25%, followed by Japan’s NTT Docomo Inc with 6.3%. 

We are positive on the deal as Axiata strengthens its position in South Asia. However, post-merger, Axiata will have to reverse the net loss at Airtel amounting to RM455.2 million in the financial year ended March 2015. 

We expect Airtel’s operations to break even in one to two years, given Axiata’s experience in consolidating Axis into XL in Indonesia.

According to a separate announcement, Axiata is tying up with Telekom Malaysia Bhd (TM) and Packet One Networks (M) Sdn Bhd (P1), whereby Celcom Axiata Bhd will provide 2G and 3G roaming services to assist P1’s venture into the mobile segment. 

In return, Axiata will have access to TM’s high-speed broadband (HSBB) network to offer fixed broadband services. 

Currently, Maxis Bhd is patronising TM’s HSBB backhaul infrastructure to provide fibre-to-the-home broadband services.

We see the agreement as a win-win deal as it allows both parties to expand into new markets by sharing infrastructure at lower costs. 

Meanwhile, after the announcement of the revised Budget 2016 last Thursday, telco shares were hit by sharp selldowns after the prime minister announced that the government will optimise revenue from the telecommunications spectrum through a redistribution and bidding process. 

With no details provided, we are currently awaiting further announcements from the Malaysian Communications and Multimedia Commission regarding spectrum bidding or re-farming.  

While we are positive on both deals mentioned above, we have yet to incorporate potential earnings growth or dilution from the deals, pending details from the management. — JF Apex Securities Bhd, Jan 29