Axiata Group's (Axiata) subsidiary, XL Axiata (XL) has formally announced its proposed merger with Smartfren Telecom (Smartfren), valuing the merged entity at an enterprise value of IDR104 trillion. This proposed merger is not a surprise and has been widely anticipated by the market. Following the announcement of a non-binding MoU in May, Axiata has kept to its deadline to finalise the proposed transaction by year-end. Although the proposed merger is expected to create synergies by bringing together combined scale, competencies and market knowledge, potential earnings impact to Axiata is likely to be minimal, estimated to be <2%. Post-merger, Axiata's shareholding in XL will drop from 66.4% to 34.8% of the merged entity. Essentially, we view this as partial monetisation of Axiata's investment in Indonesia. As its effective stake will be less than 50%, Axiata could only equity account XL's earnings in the future. We maintain our Neutral call on Axiata.

• Merger details. XL, a 66.4% subsidiary of Axiata, announced a proposed merger with Sinar Mas' 77.5% subsidiary, Smartfren, to create a combined entity with an enterprise value of IDR104 trillion (USD6.5bn). The merged entity, to be named XLSmart, will have a combined subscriber base of around 94.5m in Indonesia. Post-merger, Axiata and Sinar Mas will become joint controlling shareholders of XLSmart with an equal stake of 34.8% each. Axiata will receive up to USD475m cash in two payments with USD400m at completion of the deal and another USD75m on the first anniversary subject to the satisfaction of certain conditions. Net debt to EBITDA is estimated to improve from 2.59x to 2.48x as the cash proceeds will be utilised to pare down debt.
• Indonesia's mobile sector. Currently, there are four key mobile operators in Indonesia with XL and Smartfren being the 3rd and 4th largest, respectively. Post-merger, the sector will consolidate into 3 major players. We estimate that XLSmart is not likely to unseat the second-largest player, Indosat Ooredoo, though they both could hold comparable market share of 27% and 28%, respectively (Telkomsel remains the leader with ~44% market share). While we believe this would solidify XL's market position and there would be synergies to be reaped (estimated at USD300-400m a year), these benefits are not likely to be felt in the immediate term given the time and cost of integration process. The deal is expected to be completed in the first half of 2025.

Source: PublicInvest Research - 12 Dec 2024