Cost synergies, greater capacity expected for DiGi in potential merger

This article first appeared in The Edge Financial Daily, on May 8, 2019.
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DiGi.Com Bhd
(May 7, RM4.80)
Maintain hold with a higher target price (TP) of RM4.70:
Axiata Group Bhd and Telenor Group announced that they are in discussions about a potential non-cash merger of their Asia operations under a new merged entity (MergedCo), in which they will own 43.5% and 56.5% stakes.

MergedCo would include a combined Digi-Celcom (Malaysia), plus XL (Indonesia), DTAC (Thailand), Telenor Pakistan and Myanmar, Ncell (Nepal), Smart (Cambodia), Dialog (Sri Lanka) and tower assets.

The plan is to sign a binding agreement by the third quarter of 2019, though it is uncertain whether the signing would occur at this stage.

DiGi.Com Bhd plans to acquire Celcom via a share swap. Thereafter, Axiata and Telenor would inject their stakes in Digi-Celcom into MergedCo.

Based on our understanding, the plan is to keep DiGi’s listing status, suggesting that MergedCo will seek a mandatory general offer (MGO) waiver from the relevant regulatory authorities.

After the merger, Digi-Celcom would be the largest mobile operator in Malaysia with an estimated pro forma revenue market share of 54% in 2018, overtaking Maxis Bhd (34%).

Axiata and Telenor expect MergedCo to realise cost synergies of RM15 billion to RM20 billion. Of this, Axiata guided about 45% or RM7 billion to RM9 billion will arise from the merger between Digi and Celcom.

This will mainly be derived from operating expenditure savings from removing duplicate network sites, sharing information technology system platforms and rationalising sales and marketing expenses.

Combining spectrum holdings will also lead to more efficient usage and greater capacity, resulting in capital expenditure avoidance.

In our view, key risks that may derail the deal are getting regulatory approval for the Digi-Celcom merger and transfer of assets or licences in nine markets into MergedCo with an MGO waiver; and potential disagreements over the control or framework in running MergedCo, including key personnel appointments, as well as longer-term strategy or plans. — CGSCIMB Research, May 7