This article first appeared in The Edge Malaysia Weekly on November 7, 2022 - November 13, 2022

MAXIS Bhd raised eyebrows on Nov 2 when it said it “will be seeking shareholders’ approval” before entering into the 5G Access Agreement (AA) with Digital Nasional Bhd (DNB) when three other smaller listed telecoms companies — Digi.Com Bhd, Axiata Group Bhd and Telekom Malaysia Bhd — that entered into the same agreement had said they do not need their shareholders’ nod to go ahead.

“The [Maxis] board has assessed the governance requirements and in reliance on professional advice, believes that it is mandatory for Maxis to seek shareholders’ approval given the nature of the AA and the substantial undertaking involved,” Maxis says in its Nov 2 statement to the stock exchange, without specifying the size of the “substantial undertaking” or elaborating on the “professional advice” received.

Given that Maxis cited Section 223 of the Companies Act 2016 (CA) and Paragraph 10.07 of the Bursa Malaysia Main Market Listing Requirement (LR) when indicating that an extraordinary general meeting (EGM) will be called, the resolution tabled is expected to be an ordinary resolution that requires only a simple majority to pass.

That essentially means the resolution will pass with a nod from Maxis’ board-represented majority shareholder, given that billionaire Ananda Krishan and parties aligned to him control a 62.29% stake — unless they are deemed a related party and cannot vote.

Both Section 223 of the CA and Paragraph 10.07 of the LR consider an undertaking to be of substantial value if the value exceeds 25% of the company’s total assets, total net profits or issued share capital of the company, whichever is highest.

Maxis’ stance piqued interest because it was offered the same terms as the five who had signed up, three of which have smaller market capitalisation as well as smaller profits than Maxis at the time of writing, while two others are not listed.

Given Maxis’ scale, the size of the threshold that needs to be crossed to justify the calling of an EGM will be a lot higher than the size of the minimum commitment required for the AA with DNB — which back-of-the-envelope calculations show to be significantly less than the amount Maxis usually spends on capital expenditure (capex) every year as part of its ordinary course of business that does not require shareholders’ approval.

Maxis spent RM1.19 billion on capex in FY2021 and has only spent RM684 million on capex in 9M2022, being 74% of its net profit of RM942 million and 9.5% of revenue of RM7.24 billion during the nine-month period. As Maxis’ total assets stood at RM23.08 billion at end-September 2022, a 25% threshold works out to RM5.75 billion.

“If you do not think they’re just buying time to get a better deal, Maxis could be looking at the potential change in value of its network assets. I don’t know if that warrants an EGM [but] accelerated depreciation [is accounting policy and] has been done without shareholders’ approval [and the] single wholesale network is government policy that is not up to the shareholders,” an observer replied when asked.

At press time, Maxis has yet to revert to questions seeking comment on what it intends to ask its shareholders’ permission for at the EGM.

Its Nov 2 statement did not say what the board’s recommendation on the AA with DNB was, only that Maxis “intends to complete approvals process by January 2023, and commercially launch 5G-related products and services soon thereafter”.

“Further announcement setting out the details will be provided in due course,” the statement reads.

As an ordinary meeting requires at least 14 days’ notice, and a notice had not been posted as The Edge went to press, it is likely that the EGM will take place after the 15th general election polling date on Nov 19.

At this juncture, what’s certain is that by not signing up for the AA by Oct 30, Maxis will not be able to offer 5G services in Malaysia just yet while its rivals forge ahead. Maxis will also not get the free usage of DNB’s 5G network through end-2022 enjoyed by the five mobile network operators (MNOs) that have signed on.

By missing the Oct 30 early sign-up deadline, Maxis is risking the possibility of having to make a larger minimum commitment to DNB, given that it is “committed to playing an active and leading role in bringing 5G to the nation in line with the government’s digital ambitions through DNB’s network [and] looks forward to bringing the best of 5G services and converged solutions to all its customers and is focused on launching 5G as part of its suite of offerings in the near future”.

To offer 5G in the future on DNB’s network, indications are that Maxis will have to agree to a higher minimum commitment of 1,000Gbps per month or RM360 million per year (if it signs up by end-2023) or 1,200Gbps per month or RM432 million per year (if it signs up after 2023).

The five that have signed on — Celcom, Digi, Telekom, U Mobile and YTL Communications (Yes) — only need to commit 800Gbps per month or RM288 million per year for wholesale fees to DNB.

Put another way, the additional 200Gbps to 400Gbps higher minimum commitment per month means that the minimum amount that Maxis needs to spend with DNB stands to be between RM72 million and RM144 million higher than that of rivals per year and RM720 million to RM1.44 billion more than rivals over 10 years, depending on when it signs up — if Maxis does not require more than 1,200Gbps a month, simplistic back-of-the-envelope calculations show (see Table).

These numbers are based on a rate of RM30,000 per Gbps for the first 1,200Gbps indicated in DNB’s access documents, which also mentions a discounted rate of RM22,000 per Gbps for volume above 1,200Gbps a month.

It is worth noting that Maxis requires RM78.2 million to pay a dividend of one sen and Maxis has declared a dividend of five sen per share totalling RM391 million per quarter for four straight quarters between 4Q2021 and 3Q2022.

It is understood, however, that Maxis will negotiate to get on board with DNB on similar terms as the five that have signed on, citing the need to seek shareholders’ approval as the reason for it not meeting the Oct 30 deadline to sign up.

A wholesale fee of RM288 million for 2023 could negatively hit profits of Axiata the least at 14%, followed by 15% for Maxis and Telekom, 17% for Digi and 24% for Celcom, UOB Kay Hian Research analyst Chong Lee Len estimates in a Nov 3 note.

Those who think Maxis would need a lot more capacity than the higher minimum monthly commitment imposed by DNB after Oct 30 would say the difference is “negligible” in the longer run, considering the fact that Maxis spends easily RM1 billion on capex a year currently.

Still, the real challenge, even for a leading operator like Maxis, would be during the initial one to two years when 5G is being ramped up, an observer says.

The five early bird MNOs would be allowed to carry forward capacity that have not been utilised every month next year, something that may not be extended to Maxis, subject to negotiations with DNB.

In its Oct 31 statement, Axiata says the fact that Celcom Axiata is entering into the AA agreement with DNB “is expected to affect Axiata Group’s earnings from 2023 onwards”.

Digi, which is in the process of merging with Celcom, did not comment on the potential impact of the AA on its 2023 earnings in its Oct 31 statement, but notes that the 5G single wholesale network (SWN) policy and signing of the AA with DNB “may lead to a gradual shift in Digi’s operating model away from the traditional network ownership model towards a radio network leasing model, as 5G traffic grows”.

Telekom, meanwhile, said on Oct 31 that there “will be earnings pressure arising from the execution of the AA” in the short term as it grows its mobile subscriber base but there might be positive impact on future performance as the 5G value creation strategy is realised in the medium to long term.

The AA signed on Oct 30 will be deemed to have commenced retrospectively from Oct 7, 2022, and apply through Oct 6, 2032, clearing the path for the closing of the equity subscription agreement that valued DNB at RM1.43 billion.

The commitment by the five telcos on AA should help fund DNB’s costs, with a portion also coming from the equity take-up that Maxis is not participating in.

Some RM958 million is coming from the four telcos taking up 65% equity interest in DNB sold by the Ministry of Finance (MoF), which retains a 35% stake plus a golden share.

Both Celcom and Digi are to take a 12.5% stake at RM178.57 million each (with the merged entity’s stake capped at 25%), while Telekom and YTL would each subscribe for 20% for RM285.6 million, with the remaining 35% with the MoF.

If the Celcom-Digi merger falls through, the commitment for equity in DNB would be RM291.7 million for a 17.5% stake each, with the four MNOs sharing a 70% stake in DNB and the MoF will have a 30% stake with a golden share.

DNB has said that the entire 5G network rollout is expected to cost RM16.5 billion over the next 10 years, of which RM12.5 billion is for 5G network equipment (capex) with the remaining RM4 billion being corporate costs that include staff cost, professional fees, data centre expenditure, insurance coverage as well as marketing and promotional costs.

Of the RM12.5 billion cost for network equipment (capex), RM4 billion goes to Ericsson as Network Equipment Provider (NEP), “roughly RM2.3 billion [of which] will remain in the country”, according to DNB. The remaining RM8.5 billion equipment cost is for infrastructure development over 10 years, with RM4 billion going to site owners and tower infrastructure companies, roughly RM2.5 billion for fibre leases, RM1 billion for power supply and another RM1 billion Apparatus Assignment fees to the Malaysian Communications and Multimedia Commission (MCMC).

DNB targets to have an 80% population coverage by end-2024, with coverage expected to reach 40% by year-end.

“We think the potential earnings hit from 5G wholesale fees has already been factored into telcos’ share prices, which are down by an average of 17% year to date. We prefer the fixed to mobile segment due to better revenue growth prospects and more benign competition. Telekom is our top Malaysian telco pick, though its share price is unlikely to re-rate until the Review of Access Pricing is concluded by February 2023,” CGS-CIMB Securities analysts Foong Choong Chen and Sherman Lam say in a Nov 1 note, noting that downside risks to their “overweight” recommendation on Telekom include “low final access pricing for high-speed broadband (HSBB). “Adverse policy changes after the upcoming GE15” is another downside risk, they add.

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