This article first appeared in The Edge Malaysia Weekly, on December 28, 2015 - January 3, 2016.

CHRISTMAS came early for Axiata Group Bhd. It acquired an 80% controlling stake in Nepal’s number one operator, Ncell — which enjoys very high margins, a nearly 50% subscriber market share and a more than 50% revenue market share — on Dec 21.

Apart from the implied transaction multiples being deemed attractive, Ncell is poised to boost earnings upon completion of the deal in the first half of 2016. In addition, Axiata expects Ncell’s strong cash flow generation to support its dividend payout policy.

The group will also be better positioned to capture the one million-strong market of Nepalese working in Malaysia with its US$1.365 billion (RM5.85 billion) newly acquired unit. There are also one million to four million Nepalese working in India, where Axiata has a presence through 19.8%-owned Idea Cellular Ltd.

Based on FY2014 pro forma numbers, Ncell would have boosted Axiata’s revenue by 9%, Ebitda by 14%, profit after tax and minority interest by 11% and Ebitda margins by two percentage points to 39%.

Yet, why would TeliaSonera sell its stake in Ncell if all is well and good?

What we know is that Axiata was “early” in sending in an unsolicited bid and that TeliaSonera president and CEO Johan Dennelind, who was formerly CEO of DiGi.Com Bhd, in September announced plans to reduce the company’s presence in Eurasia to focus on its European and Baltic markets. TeliaSonera’s other Eurasia markets — Azerbaijan, Kazakhstan, Tajikistan, Georgia, Moldova and Uzbekistan — are all outside Axiata’s focus.

Still, will the higher debt levels post-acquisition nudge Axiata to give more thought to putting its tower unit edotco up for initial public offering (IPO) as well as selling more of its towers in Indonesia to pare its debt?

Based on 2014 numbers, the Ncell purchase would raise Axiata’s gross debt-to-Ebitda levels from 2 times to 2.3 times, but these multiples could go up to between 2.5 times and 2.6 times in 2015 due to a US$400 million bridging loan — it is understood that this is slightly above the 2.5 times level that Axiata is comfortable with.

Nonetheless, analysts are generally positive about the deal and do not think Axiata need to call a rights issue at this juncture.

“With the bridging loan, [gross] debt-to-ebitda levels may rise above 2.5 times, but they have initiatives to bring that down to around 2.3 times by end-2016,” a seasoned analyst says, adding that Axiata has the balance sheet to stomach the deal.

“Certainly, cash calls can be a good opportunity to enter a good company … Unless global conditions deteriorate further and risk appetite falls drastically, Axiata can digest this deal.”

In a Dec 22 note, Nomura analysts Pankaj Suri and Sachin Gupta “see multiple merits in this deal” and estimate that Axiata’s net debt-to-Ebitda levels could expand to around 2 times from 1.3 times in 3Q2015.

Axiata president and group CEO Datuk Seri Jamaludin Ibrahim told The Edge in a recent interview that the group’s towers in Indonesia are for sale at the right price, given that they could not be packaged under edotco, which can be floated when the time is right. While some reckon an IPO could happen within the next 18 months, for now, Axiata is still increasing efficiencies that will enhance the valuations of edotco, which could potentially see an additional 2,550 towers from Ncell added to it once the Ncell deal is approved by Axiata’s shareholders and the relevant authorities.

Axiata, which Jamaludin said is constantly considering consolidation in the countries it operates in as a way to boost earnings and market share, has always maintained a conservative stance in terms of acquisition. Jamaludin also said Axiata will not overpay.

The group — which has companies in Malaysia (Celcom), Indonesia (XL), Sri Lanka (Dialog), Bangladesh (Robi) and Cambodia (Smart) as well as associate stakes in companies in Singapore (M1) and India (Idea Cellular) — has so far been unsuccessful in its bid for a mobile licence in Iran and Myanmar.

In October, edotco paid US$221 million for a 75% stake in Digicel Myanmar Tower Co, a deal that could provide further upside for its tower unit. The company recently announced that Singapore-listed Yoma Strategic Ltd will retain the remaining 25% stake and stay on as a partner in Myanmar.

Axiata says Ncell is the largest taxpayer in Nepal in FY2012/13. Its local partner, Sunivera Capital Ventures Pvt Ltd, with a 20% stake in Ncell, is a party “well versed with the telecommunications industry and regulatory environment in Nepal”. It says it has known Sunivera for several years from its Cambodia investment.

A poser that arose is whether Axiata can successfully retain the high margins that make the deal attractive — especially considering that international long distance (ILD) service revenue is a significant contributor to Ncell’s earnings and this is a business where revenue is declining due to free over-the-top services. ILD services account for 35% to 40% of revenue.

According to Axiata, Ncell had an Ebitda margin of 59% in the financial year ended mid-July 2015, and the annualised number was even more impressive, at 62.2%, compared with 61.1% in FY2014.

Yet, this could drop nearer to 50% or even 30% to 40% levels if ILD revenue falls significantly. Axiata tells analysts that the margins can be maintained at about 50% even with high single-digit annual declines, adding that it had factored in a slide in ILD revenue in arriving at its bid.

Now that the deal will be presented for approval by Axiata’s shareholders in 1Q2016 and expected to be closed by 2Q2016, its job is to make sure the acquisition works well for the group.

The young demographic in Nepal is a plus. While SIM card penetration is already 101% in Nepal, there is still room for growth. At present, unique subscriber penetration is only 51.1%, smartphone penetration, 18%, and broadband penetration, 21.5%.

As at July 17, Ncell had 48.8% of the 26.7 million mobile subscribers in Nepal but 57.5% of revenue market share (NPR96.91 billion), implying that it has a higher spending customer base. The No 2 player — Nepal Telecom — is state-owned and has a 42.5% revenue market share and a 46.2% subscriber market share, leaving only a 5% subscriber market share for a third operator.

“Apart from Ncell and Nepal Telecom, a few more players have been allocated spectrum. However, with only one of these players active so far and still struggling, we believe it is unlikely others will launch or turn aggressive,” the Nomura analysts wrote in the note.

The other wild card is the uncertainty about what it will cost Axiata when Ncell’s spectrum assignment expires in 2019. On this, investors may draw comfort from the fact that Ncell is a large taxpayer in Nepal and will continue to pay more taxes if it does well.

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