KUALA LUMPUR (May 28): Axiata Group Bhd says the proposed merging of its business with Norway-based Telenor ASA's Asian operations is "a merger of equals" and not about one company taking over the other, rubbishing claims circulating online that the exercise was akin to selling Malaysian interests to a Norwegian company. 

The eventual ownership in the merged entity, known as MergedCo at this juncture, is purely mathematical and based on the relative valuation of both parties’ assets, Axiata told theedgemarkets.com recently. 

Under the planned ownership ratio, Telenor will have 56.5% in the MergedCo, while Axiata will have 43.5%. This is because Telenor’s valuation of assets in the merger works out to be higher than that of Axiata’s, the group said. 

The valuations are based on several measurements to include operating profits, analysts’ estimates, forecasts, and market valuations. However, it excludes revenue and the number subscribers each entity has, according to Axiata.

“Despite Telenor having a majority stake, on matters of governance of the new MergedCo, the concept of merger of equals is fundamental to this proposed merger. Although Axiata does not own a majority stake in the MergedCo, we would own a significant share of a much larger group and value, as the value of our assets would increase due to the synergy benefits of the merger between RM15 billion to RM20 billion, of which our portion [works out to] RM7 billion to RM9 billion. Capex savings would be approximately two-thirds of that, of which close to 40% would be the savings in Malaysia alone or RM4 to RM5 billion,” the group said.

The deal also includes the merger of Axiata's wholly owned Celcom Axiata Bhd and Telenor's 49%-owned Digi.Com Bhd (MalaysiaCo), in which roughly 67% will be owned by the MergedCo.

“Together with some major government institutions which would own this entity directly, Malaysian institutions will be the single largest shareholder in MalaysiaCo, based on a combination of direct and indirect shareholdings of approximately 46%, compared to Telenor’s indirect ownership of around 38%," the group said.

And the MalaysiaCo will be a national champion, with a potential market capitalisation exceeding that of Axiata’s current market value of about RM41 billion, based on its stock's closing price on Monday.

MalaysiaCo CEO will be Malaysian

To ensure balance in the merger, and to remain totally committed to the Malaysian national agenda, the chairman of MalaysiaCo is to be nominated by Axiata and will be a Malaysian. “A majority of MalaysiaCo’s board members will be Malaysians, and its chief executive officer will also be a Malaysian,” Axiata said.

As for the MergedCo, its board of directors mix will reflect the shareholding structure, but its chairman will be from Axiata. “The board will be professionally run with the mandate to make all decisions in Malaysia for the benefits of the MergedCo,” said Axiata.

According to Axiata, the MergedCo will have a proforma revenue of over RM50 billion and a net profit of RM4 billion. It will have operating subsidiaries in nine countries with a total of 300 million customers, making it one of the largest telecommunication companies in the South Asian and Southeast Asian regions.

The merger will also see the creation of a global tower company, combining Axiata's existing tower company (TowerCo), edotco Group Sdn Bhd -- which is currently the 13th largest TowerCo globally -- and Telenor’s tower assets in Asia, thus paving the way for the fourth largest tower company in the world.

The proposed deal also includes the establishment of an innovation centre in the region, in which the MergedCo will invest RM100 million a year in areas pertaining to the Internet of Things, Artifical Intelligence, Robotics and 5G solutions. “It is envisaged to be the largest in the region and would conduct research and develop products and solutions that would put Malaysia in the global map of technology innovation,” said Axiata.

The merger will result in the creation of three companies; the MergedCo, the MalaysiaCo and the global TowerCo. All three will be listed separately within five years.

Axiata is currently the eighth largest public listed company in Malaysia. Post-merger, the MergedCo could be among the top three companies on Bursa Malaysia, while the MalaysiaCo will rank among the top five, and the global TowerCo will have a place among the top 25. “This will substantially help to attract investments into Malaysian capital markets,” the group said.

Both Axiata and Telenor will work towards entering a binding agreement for the proposed transaction by the end of the third quarter of 2019, once a due diligence exercise is completed.

Last week, the Malaysian Communications and Multimedia Commission(MCMC) released its guidelines on mergers and acquisitions of telecommunications companies, to increase clarity and provide transparency to the industry. The regulator is expected to make a decision pertaining to the proposed Axiata-Telenor mega merger once it obtains and evaluates all the relevant information. 

Consumers expected to benefit

The challenge for telecommunications companies, be it in Malaysia or globally, is to attract customers by providing excellent network quality and coverage, together with innovative products, at an affordable price. To offer these, a significant investment in both capital and operating expenditure is needed.

The merger, Axiata believes, would help provide the scale required for a substantial outlay of resources. 

“Given the scale that the merger brings, consumers are expected to benefit from affordable prices, better network quality and coverage, and more innovative products, due to a much stronger Malaysian entity and the regional innovation center. With a stronger balance sheet and the enhanced profitability of MalaysiaCo, we will have the ability to offer affordable 5G and broadband services while increasing network coverage and quality, much better and earlier than Celcom or Digi could do [in their individual capacities], to support the Malaysian Digital Agenda,” the group said.

Axiata added that the improved profitability of the Malaysian entity would also lead to higher corporate taxes paid in the country.

No job losses

Axiata also reiterated that the planned merger will not result in any retrenchments. 

“No employee will be forced out, as we do not believe the company should benefit from this merger at the expense of our employees. If there is any plan for reduction of manpower, it will purely be on a voluntary basis. Celcom has never retrenched their employees in the history of the company while being managed by Axiata,” the group said.

And with a bigger scale and profitability, the MalaysiaCo will also be able to avoid job cuts, a path that many less profitable telecommunication companies in developed countries have been forced to choose.

“Whatever we do will be from the position of strength and therefore, we would have the luxury to manage any reduction of workforce, if required, through voluntary means. Our people plan includes the retraining or reskilling of employees to new areas,” the group said.

Instead of job cuts, new jobs will be created, the group said, and the quantum will be more than the individual company would have been able to provide, due to the financial strength of MalaysiaCo. The positions will be in new areas of growth, namely home broadband, enterprise, and solutions.

The planned regional innovation centre alone will need to hire about 200 people -- including Malaysians -- once it is set up, it added.