Green light for Axis acquisition - AXIATA

by **Cals** Thu 15 Aug 2013, 09:22

Green light for Axis acquisition
Business & Markets 2013
Written by AmResearch
Thursday, 15 August 2013 08:51

Axiata Group Bhd
(Aug 14, RM6.93)
Maintain buy at RM6.93 with a fair value of RM7.30: It was reported in the local dailies on Aug 14 that the Indonesian government had indicated that it will give formal approval to Axiata to own a stake in PT Axis Telekom Indonesia (Axis) later this year.

It was reported in July 2013 that XL Axiata, Indonesia's third largest telecommunications company, had already secured preliminary approval from the Indonesian communications and information ministry for the acquisition of Axis.

To recap, XL Axiata, in which Axiata Group has a 67% stake, has been looking to put in a bid to acquire Saudi Telecom Company's 84% stake in Axis. Based on news reports that surfaced in May, Axis was valued at an enterprise value of US$1 billion (RM3.27 billion).

Launched in 2008, Axis provides 2G and 3G services. Besides Saudi Telecom Company, its other shareholder is Maxis Communications Bhd. Axis has more than 70% population coverage in Indonesia and 17 million subscribers (versus XL Axiata's 49.1 million), or a 6% estimated share of the Indonesian market.

A potential acquisition by XL Axiata may bring a few key positives: (i) elimination of competition might allow price stabilisation and improve competitive dynamics; (ii) cost reduction given consolidation of infrastructure — Axis has 10,000 2G and 3G sites versus XL Axiata's 39,819 sites; (iii) potential 35% expansion in the number of subscribers to 66 million, potentially positioning the merged group as the second largest player in Indonesia; and (iv) acquisition of additional spectrum which could reduce capital expenditure by 40% to 50% — Axis currently owns a 10MHz block in the 2.1 Ghz (3G) spectrum, while XL Axiata has 15MHz.

During XL Axiata's results teleconference, management was still tight-lipped on the pricing of a potential acquisition, but indicated that both parties have been looking at it seriously for quite some time and are in the midst of working out "solutions" in valuation versus components in Axis that comes with a potential acquisition.

One major regulatory hurdle is that XL Axiata may not get to acquire all of Axis' 10MHz block. It is said that for the acquisition (including spectrum) to go through, XL Axiata itself needs to return a 5MHz block in the 2.1GHz spectrum it recently won.

Maintain "buy" on Axiata at unchanged fair value (FV) of RM7.30. Depending on valuations, a potential acquisition could provide upside to our current valuations. As a rough gauge — assuming an internal rate of return of 15% for a RM3 billion consideration — we estimate that an acquisition could enhance our FV by 3.5% (or about 25 sen per share). — AmResearch, Aug 14

This article first appeared in The Edge Financial Daily, on August 15, 2013.