KUALA LUMPUR (Dec 21): Axiata Group Bhd is set to gain entry into Nepal's telecommunications market with the purchase of a controlling stake in Nepal’s number one mobile operator Ncell Private Ltd for US$1.37 billion (RM5.91 billion).

Ncell is the number one player in the market with 13 million subscribers representing 48.8% of the subscriber market share and 57.5% of the revenue market share, according to Axiata’s Bursa Malaysia filing today.

Axiata said its wholly-owned subsidiary Axiata Investments (UK) Ltd has entered into a conditional sale and purchase agreement (SPA) with TeliaSonera UTA Holdings BV and SEA Telecom Investments BV to purchase Reynolds Holding Ltd, which holds an 80% stake in Ncell.

The purchase consideration shall be satisfied in cash and shall be funded via a combination of internally generated funds, debt instruments and external borrowings.

The remaining 20% stake in Ncell, held by Niraj Govinda Shrestha, one of the directors of Ncell currently, will be transferred to Sunivera Capital Venture Pvt Ltd prior to the completion of the proposed acquisition. The purchase is subject to approval from Axiata shareholders and transfer of the remaining 20% stake to Sunivera.

The SPA would be automaticaaly terminated if all parties fail to fulfil all conditions by the long stop date of June 30, 2016, unless otherwise agreed by all parties.

Axiata said the purchase meets all of Axiata’s merger and acquisition (M&A) criteria of brownfield investment, management control, growth market, attractive valuation, being earnings accretive and is within its target footprint.

Axiata said Ncell’s strong cashflow generation with an operating free cashflow of over NPR22 billion (US$217 million or RM923 million) per annum, would further support Axiata’s dividend paying policy.

“Ncell has delivered revenue CAGR of 19.9% between financial year 2013 to 2015 (FY13 to FY15), with attractive earnings before interest, tax, depreciation and amortization (EBITDA) margin of 62.2% in FY15,” it added.

In a statement, Axiata said Ncell would contribute more than 9%, 13% and 19%, respectively to its financial year ended Dec 31, 2014 pro forma revenue, earnings before interest, taxes, depreciation and amortisation (EBITDA) and profit after taxation and minority interests (PATAMI).

Axiata also said the implied last-twelve-months enterprise valuation over EBITDA of 5 times including controlling premium in Ncell is an attractive valuation compared to 5.7 times and 8.4 times for South Asia and Asean peers, respectively.

“[It is] consistent with Axiata’s merger and acquisition (M&A) priorities of an opportunistic footprint expansion, being both very attractive strategically and financially for the group,” the statement read.

Axiata president and Group chief executive officer (CEO) Datuk Seri Jamaludin Ibrahim said the acquisition was a “rare opportunistic asset” for the Axiata Group.

“Consolidating Ncell to Axiata’s FY14 pro forma, the new asset would be immediately accretive to the group, contributing approximately 9% to revenue and 19% to PATAMI, and would make it one of the highest contributors to earnings for the group. 

“This also increases the resilience of Axiata with a more diversified portfolio given that Ncell would be a very sizeable part of the group and lessen our traditional high dependency on the two largest operating companies.”

Jamaludin also said the company’s entry into Nepal is a long-term strategic move for the group.

Ncell’s return on invested capital (ROIC) was over 70% in FY15, Axiata said, and is the largest foreign direct investment in Nepal.

“Ncell also holds a sufficient and good mix of spectrum portfolio. This includes paired spectrum of 8 megahertz (MHz) of 900MHz, 11MHz of 1800MHz and 10MHZ of 2100MHz spectrum,” the statement added.

The Malaysian telco player also said Nepal’s mobile industry landscape is a two-player market with a mobile penetration of unique subscribers of 51.1% and mobile broadband penetration of 21.5%, with 33.1% compound annual growth rate (CAGR) in internet subscribers from 2012 to 2014.

Nepal also recorded an economic CAGR of 4.2% over the past six year, with a young population where an estimated 68% of its total 28 million is below the age of 35, it noted.

Post-acquisition, Axiata will have presence and reach in five key countries across South Asia, besides its footprint in Southeast Asia, with over 280 million customers from 268 million currently. 

Axiata's stock was suspended from trading pending the material announcement today. It was last traded at RM5.98, for a market capitalisation of RM52.72 billion.

(Note: The Edge Research's fundamental score reflects a company's profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)