XL Axiata (EXCL IJ)

Merger plan to offer upside; reiterate Buy rating as we see deal risks to be manageable

 

  • We believe the planned MergeCo to generate better consumer experience and thus, expect value accretion potentials from the deal.
  • We see upside to our current valuation (DCF-based TP of Rp3,3300) from the combined spectrum allocations and tower sites optimization
  • Maintain Buy rating. We believe risks on the deals are manageable, as both parties appear committed and with IOH’s merger as a precedent.

Both shareholders to own controlling stake in MergeCo as per MoUs. 

Disclosures from both Axiata and Sinar Mas suggest that both will own controlling stakes at the mergeCo exerting equitable influence. Axiata’s MoU says Axiata & EXCL will offer scale and expertise in finance and telco, whilst Sinar Mas offers the local scale and market knowledge. We assume EXCL to be the surviving entity in a share swap deal due to its strong branding, telco expertise and need for Axiata to maintain scale on regional basis. The combined entities EBITDA suggests that Axiata and Sinar Mas may own ~75%/25% in the resulting MergeCo. Hence Sinar Mas may probably top-up via FREN’s outstanding warrants to get more control.

 

Capital gains for shareholders with mergeCo offering longer perspective.

We see incremental value for both EXCL/ FREN through the combined spectrum allocations and tower sites optimization. This should enable MergeCo to offer better consumer experience, as the MoUs emphasize. Hence, we believe the combined telco value should worth more than the total value of the two standalone entities, similar to the IOH merger synergies.

 

Maintain Buy rating on upside from merger value accretion potentials

We reaffirm our view of value accretion potential from the merger, hence possible upside to our DCF-based TP Rp3,300 (implying 5x EV/EBITDA). We believe current 4.4x EV/ EBITDA (-1SD to 5-year mean) implies market concerns over the deal (i.e., deterioration in operation due to delay risks). We believe the precedent from IOH merger should offer better roadmap for the planned mergeCo to identify synergies. The MoUs released came shortly after the conclusion of FREN’s Rp7tr capital raising (first prospectus released in Oct23), which suggests the deal was well planned since last year.

 

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