This article first appeared in The Edge Malaysia Weekly on May 30, 2022 - June 5, 2022
IF one had not got wind of the fact that at least two major shareholders — the Employees Provident Fund (EPF) and Permodalan Nasional Bhd (PNB) — were against Axiata Group Bhd’s proposed acquisition of Indonesia-based high-speed broadband and cable TV provider PT Link Net Tbk, or had not paid attention to the details of the electronic poll voting outcome just before the conclusion of the extraordinary general meeting (EGM) to seek shareholders’ nod on May 26, there was hardly any indication of there being opposition to the RM2.57 billion purchase that only needed a simple majority to pass.
Yet, it is not just dissenting votes from sizeable institutional investors. PNB and EPF are represented on Axiata’s board by Syed Ali Syed Salem Alsagoff and EPF chief strategy officer Nurhisham Hussein respectively as non-independent, non-executive directors.
Of the 1,069 shareholders and proxies holding 8.37 billion shares present at the EGM, only 129 or 12.07% of the attendees voted against the deal. But they represented 3.53 billion shares or 42.17% of those present and voting at the virtual EGM that began slightly after noon following the conclusion of Axiata’s annual general meeting (AGM).
Up to 88% or 3.1 million of the 3.53 million shares that voted against the deal could belong to PNB and its related funds under AmanahRaya Trustees (17.94%) and EPF (16.95%), whose collective shareholding came to about 31.7% of the total votes cast at the EGM, according to Axiata’s top 30 shareholding list as at March 31, 2022, and the latest filing on EPF’s holdings.
To be sure, it is not easy but not impossible to outvote Axiata’s largest shareholder, Khazanah Nasional Bhd, which has 3.37 billion shares or 36.74% equity interest and made up 40.2% of the total votes cast at the EGM, our back-of-the-envelope calculations show.
Making intentions known
Observers reckon that PNB and EPF were not aggressively lobbying to overturn the deal that was announced in late January — as there was no public lobbying ahead of voting — but had merely wanted to make their concerns known.
PNB, which discloses the direction of its voting at shareholder meetings on its website almost immediately, if not ahead of casting its votes, said it had voted against the Link Net deal because “PNB Group has concerns over the proposal having an adverse impact on the financial performance of the company in the immediate term due to the potential increase in debt levels weighing on its cash flow and earnings, coupled with lack of visibility on the impact of geopolitical developments on some of Axiata’s international operations”.
EPF, which also discloses how it votes on resolutions on its website (although usually one day after the meeting), did not state why it voted against the Net Link deal. It declined additional comment.
Asked whether it had voted against the deal because it wanted Axiata to raise its dividend payments faster instead of potentially spending more money to build its presence in Indonesia, PNB’s spokesperson referred to its statement online and said it “assesses corporate proposals based on various aspects, including its merits and financial impact on the acquirer”, adding that transparency in voting is one of its ESG commitments that is in line with its aspiration to instil stronger stewardship practices.
On whether PNB is re-evaluating its investment in Axiata, the former would only say, “While PNB values its investment in Axiata Group as one of the leading telecommunications groups in Asia, we will continuously assess any corporate proposals objectively, as we do with our other investments.”
PNB — which through AmanahRaya Trustees Bhd (Amanah Saham Bumiputera) alone held 1.095 billion shares or an 11.94% stake in Axiata at end-March — had yet to make additional disposals, based on the compulsory stock exchange filings made by those with more than 5% shareholding, at the time of writing. EPF, which had 1.56 billion shares (17.03% stake) at end-March, had trimmed its shareholding by about seven million shares over the past two months to about 1.555 billion shares (16.949%) as at May 23, filings show.
Dividend pressure
In reply to questions raised by shareholders at the EGM, Axiata president and group CEO Datuk Izzaddin Idris said that “subject to market conditions”, it could take about 10 years for Axiata to recoup its investment in Link Net — earlier if additional investments are made to accelerate mobile and fixed convergence with XL Axiata by tapping Link Net’s reach to 2.9 million homes and more than 2,400 enterprise customers — but assured that returns on invested capital (ROIC) for the deal is above its weighted average cost of capital (WACC) of 12%.
If RM2.5 billion debt is taken to finance the purchase of the initial 66.03% of Link Net from Asia Link Dewa Pte Ltd (private equity firm CVC) and PT First Media Tbk (Lippo Group), gearing would rise from 1.17 times to 1.4 times. The RM1.3 billion that may be required to fund the subsequent mandatory takeover offer for the remaining 33.97% from minority shareholders could be funded with internal cash, says Axiata. This includes RM2 billion that will come following the completion of the Celcom-Digi merger expected in the latter half of this year. Asked why the sellers were exiting, Izzaddin said private equity funds like CVC have finite investment horizons while Lippo may be realising its investments to focus on its real estate-related core operations.
Earlier at the AGM, Izzaddin told shareholders that dividends this year could be “a bit restrained”, particularly for its 83%-owned Dialog Axiata, which operates in Sri Lanka, where the government had defaulted on debt payments and the country is undergoing an economic and political crisis after being hit hard by the pandemic and soaring inflation. He also told shareholders that the one-time Cukai Makmur is estimated to be RM80 million to RM100 million, largely from the profit of its Malaysian subsidiaries Celcom and edotco.
Izzaddin reiterated, however, that Axiata remains committed to progressively raising its dividend payment to 20 sen per share by 2024. The group paid a dividend of 9.5 sen per share in FY2021, up from seven sen per share in FY2020 and matching that in FY2018 and FY2019.
It may well be a disagreement between investors with longer-term horizons and those with different considerations, including the right balance of near-term rewards for investors like EPF and PNB, which may not just be thinking of their own fund performance but also have the desire to help their members replenish their savings that have been drawn down during the pandemic. What’s certain is that the pressure for companies to deliver better and sustainable returns would only intensify as more investors exercise their rights and make informed decisions.
Meanwhile, on May 27, Axiata said Izzaddin — who had taken the helm on Jan 1, 2021, at the height of the pandemic after serving as deputy group CEO since January 2020 and a board member since November 2016 — would step down as president and group CEO of Axiata effective May 31, “based on mutual cessation of his service contract”. Axiata’s CEO for telecommunications business and group executive vice-president Dr Hans Wijayasuria and group chief financial officer Vivek Sood will act as interim joint acting group CEOs effective June 1.
Axiata chairman Tan Sri Shahril Ridza Ridzuan said Izzaddin was steadfast in translating the Axiata 5.0 Vision into execution and has been instrumental in shaping the group’s strategic response in the face of unprecedented challenges, and thanked him for his wisdom, leadership and contributions. Assuring stakeholders that the group “has always had a strong culture of succession planning”, Shahril said the board “does not expect to make additional structural or senior leadership changes in the near term”.
Will DNB have nine players equally sharing a 70% stake by June 30?
More details were revealed last week on how the government would stay on top of the country’s 5G rollout with a minority 30% equity stake plus a golden share in Digital Nasional Bhd (DNB), even after ceding 70% equity to nine players comprising six network operators and three spectrum holders.
While the government has not outrightly rejected the proposal by the country’s four largest mobile operators — Celcom Axiata Bhd, Digi Telecommunications Sdn Bhd, Maxis Bhd and U Mobile Sdn Bhd (CDMU) — seeking 51% equity control of DNB, Communications and Multimedia Minister Tan Sri Annuar Musa told reporters on May 26 that the government is firm about not wanting any telco to have a higher equity stake than other peers that have been invited to the negotiation table for equity participation in DNB. (Giving CDMU 51% in DNB would leave only 19% to be shared among five as opposed to 7.78% for each of the nine — which implies only up to 31.1% for CDMU, assuming that Celcom and Digi (which are in the process of merging) will each get to keep one-ninth of the 70%.)
The minister also told reporters at the “Yes 5G for All” launch that the government will hold 30% equity regardless of how many of the nine invitees come on board, adding that he was “not going to wait for anybody” when asked about the June 30 deadline for the industry to hammer out details on the DNB equity participation and make meaningful progress on 5G wholesale arrangements.
While the minister did not name the nine, he did confirm that they consist of six network operators plus three spectrum holders.
The first six are clearly CDMU, Telekom Malaysia Bhd (and/or Webe Digital) and YTL Communications Sdn Bhd (YES). The remaining three that are spectrum holders should be Altel Communications Sdn Bhd, Redtone Engineering and Network Services Sdn Bhd (and/or SEA Telco Engineering), and Asiaspace Broadband Sdn Bhd.
Altel has been assigned spectrum in the 2600MHz band, Redtone in the 2300MHz and 2600MHz bands, and Asiaspace in the 2300MHz band, according to ministerial directions dated December 2021 on the Malaysian Communications and Multimedia Commission website.
While Altel’s name was not found on the register of spectrum assignment for the 900MHz band alongside CDMU, a ministerial direction dated Dec 9, 2021, shows that it has also been re-assigned a 2x5MHz block in the 900MHz frequency band in December 2021 — the same block that was previously granted to it briefly on May 15, 2020, before being cancelled on June 3 that same year.
Whatever the government’s rationale, clarity by June 30 would also remove a significant overhang (read: discount) that’s weighing on sentiment. “Everyone is just tired and wants this to be over and done with ... to move on,” an observer says.
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