M&As making its way back to the spotlight

MERGER and acquisitions (M&A) took a hit last year as most businesses and economies came to a near standstill thanks to the Covid-19 pandemic.

Today, as economies begin to regain their momentum on the back of the massive roll-out of Covid-19 vaccines and the reopening of borders, economists and observers believe the time is right for M&As to pick up as companies adjust to new norms and build greater resilience under a post-pandemic landscape.

EYGM Ltd (EY) in its recent research on global M&A trends in 2020 and the outlook for transactions in 2021, expected M&As to increase year-on-year (y-o-y) in terms of deals value in 2021, as companies position themselves for improved economic activity and reframe their future.

“An increase in activity in the second half of the year was largely expected, but the rebound in global M&A following the Covid-19 pandemic related stall has been stronger, quicker and more sustained than many could foresee,” it said.

It saw that there has been a boldness in the deals announced post-July, with the aim to combine assets to offer a broader and deeper array of products and services to customers being the common thread.

“As businesses look to build resilience to withstand any future shocks or crises, transactions across all sectors have focused on capturing long sought-after capabilities and building new routes to market, rather than capturing market share,” EY Global strategy and transaction vice chair Andrea Guerzoni remarked.

Looking ahead to 2021 and beyond, it highlighted that the sectors that showed deal-making restraint during the Covid-19 pandemic will drive the next wave of activity.

“For example, the consumer sector has seen an increase in M&A involving assets that struggled through the Covid-19 pandemic, led by more financially resilient competitors, while acquisitions driven by innovative companies with a strong link to their customer base have also emerged,” it said.

It also believed that the increasing trend for alternative deal models, such as joint ventures and alliances, as companies take an ecosystem view, as well as divestments to enable strategic business shifts and reinvestment, are also expected to fuel deal making intentions.

Guerzoni further pointed out: “Companies in the consumer and industrials sectors will look to combine to take advantage of the anticipated recovery.

“These businesses will also be looking to adapt to a new environment, in which customer behaviors and preferences have changed dramatically, as a result of the Covid-19 pandemic.

“There are already signs of such developments through the strong shift to e-commerce amid moves to downsize bricks-and-mortar retail, and the reassessment and de-risking of supply chains for manufacturers.”

The expected increase in M&A activity comes as nearly two-thirds (62 per cent) of executives of surveyed companies believe that their organisations must radically transform their operations over the next two years, according to the EY Digital Investment Index.

“To achieve that, they are starting to turn to emerging technologies, with the internet of things (IoT), artificial intelligence (AI) and cloud computing among the most likely investments in the next two years (67 per cent, 64 per cent and 61 per cent, respectively).

“With 52 per cent of executives who pursued digital technologies via M&A saying that the approach exceeded expectations and 45 per cent reporting similarly for digital partnerships, 2021 is set to see an increase in deals, corporate venture capital and partnership investments,” it said.

In Asia-Pacific, EY saw that companies in the region also see M&As as a key lever of business transformation with 85 per cent of surveyed executives of companies saying that their organisations are undergoing a significant business and technology transformation.

“Executives recognise that being at the forefront of technology and digital adoption has been the key differentiator in success during the past year. Technology is the great enabler,” EY Asia-Pacific Strategy and Transactions leader Yew-Poh Mak commented.

“As the initial shock of the crisis subsided, Asia-Pacific senior executives pivoted, conducting comprehensive strategic portfolio reviews to reimagine their competitive position in the new normal.

“Now, they are seeking to rev up their M&A and transformation programmes as they look to reshape their future in the post-pandemic world,” he added.

Over in Malaysia, while the country continues its battle against the Covid-19 pandemic, sentiments are beginning to improve with the roll-out of the vaccines here.

As the country’s economy slowly recovers from the onslaught of Covid-19, talks of M&As among companies have circulated in the market.

Mega-merger in the making

KICKING off the M&A activities this year, Axiata Group Bhd (Axiata) and Telenor Asia (Telenor) officially announced earlier this month, their proposal to merge Celcom Axiata Bhd and Digi to become a company, known as Celcom Digi Bhd (MergeCo).

This is the second time both Axiata and Telenor have announced their intentions of merging their operations.

Of note, in 2019, around the same time, Axiata and Telenor surprised markets across the region with their announcement to merge their operations across Asia with their main headquarters based in Malaysia. This was expected to become one of Malaysia’s largest M&As. The merged entity was also supposed to be known as MergeCo.

The initial proposal quickly raised concerns about the merged entity and the possibility of it monopolising the telco market due to the scale of the proposed merger which involved both Axiata and Telenor’s operations across Asia. The merger also faced complexities involved in the proposed transactions.

By the end of 2019, the deal was officially called off.

Forward to 2021, Axiata and Telenor once again announced that they were in “advanced discussions” to merge their operations. The difference this time is that the merger is expected to only involve their Malaysian operations; Celcom and Digi.

Axiata and Telenor are expected to have equal ownership estimated at 33.1 per cent each. Axiata, together with Malaysian institutional funds, are expected own over 51 per cent in the company.

As part of the merger transaction, Axiata will receive newly issued shares in Digi representing 33.1 per cent post-transaction shareholding and cash equalisation amount of around RM2 billion, of which RM1.7 billion to come from Digi as new debt, balance of RM300 million from Telenor.

Both parties are expected to work towards finalising agreements in relation to the proposed transaction within the second quarter of 2021.

“The transaction will be subject to approval by Celcom and Digi shareholders, receipt of regulatory approvals and other customary terms and conditions, and the parties acknowledge that there is no certainty that these discussions will result in any agreement,” it said.

According to Axiata, the MergeCo will continue to be listed on Bursa Malaysia, and is expected to improve the liquidity and profile of the bourse as one of the largest technology company in Malaysia and among the largest market capitalisation companies in the exchange.

Axiata said MergeCo will be considered as a leading telecommunications service provider in Malaysia in terms of value, revenue and profit; with a proforma revenue of about RM12.4 billion, pre-synergy earnings before interest, taxes, depreciation, and amortisation (EBITDA) of the combined entity at approximately RM5.7 billion, and an estimated 19 million customers.

Furthermore, while the initial merger proposal back in 2019 entailed that Telenor was expected to become the majority shareholder of the merged entity with 56.5 per cent and Axiata is expected own 43.5 per cent, the current proposal could see Axiata and Telenor having equal stakes in the merged entity while the balance is expected to be held by Digi’s minority shareholders.

As for the anti-competitive matter which plagued the deal in 2019, analysts viewed that the threat as more manageable and healthier for Malaysia’s highly competitive telco market.

In a report, the research team at Kenanga Investment Bank Bhd (Kenanga Research) opined: “While MergeCo would have circa 40 per cent of the market share among the mobile players, we believe that by considering the additional competitive threats that OTT, such as WhatsApp, pose to MNO’s traditional call and SMS revenue streams, MergeCo is not in a position with an excessive amount of market share.

“Thus, we do not believe that there will be any antitrust hurdles to the deal.”

It also noted that for Maxis, MergeCo’s leaner cost structure and thus “better” product pricing could spell potential downward pressure on product prices, potentially posing a threat to Maxis’.

“But we do not see this as an immediate threat yet as executing on a leaner cost structure, is likely to be realised over a longer term, mindful that right-sizing of workforce would need to be managed carefully,” it added.

Kenanga Research also believed that compared to the 2019 attempt, there is greater incentive for both entities to merge this time, as the special purpose vehicle (SPV) ownership of the 5G spectrum to allow more space to compete in 5G offerings.

“We also see a higher (relative to 2019) likelihood of this deal going through as there are no cross-border complications, and they have agreed on a shareholder structure compared with 2019 when deal fell apart partially due to disagreement in equity stake,” it added.

M&As a much needed catalyst

THE proposed merger has also been viewed favourably by analysts given the timing of it in the current economic condition as well as with the government’s push for better connectivity and greater digitalisation across the nation.

The recently announced MyDIGITAL blueprint sets the pathway for economic transformation through accelerating the shift towards digitalisation. Coupled with the Jalinan Digital Negara (Jendela) plan, telcos now play a vital role in ensuring that the government reaches this goal.

Telcos now will have to invest quickly to meet the dateline set under the MyDIGITAL blueprint which aspires to the 5G network up and ready by the end of 2021 to 2022.

“Where connectivity is a critical digitalisation enabler, the telco industry will play an integral role in supporting the government’s decision to fast-track 5G services and deliver ubiquitous highquality broadband speed and services,” Axiata said.

“This will bode well for customers as a move that would reap benefits for the economy and industry.

“As such, MergeCo will be uniquely positioned to take advantage of opportunities that come with technological advancements and the surge in the adoption of digital services while in parallel, manage the evolving challenges of a highly competitive and complex environment.”

Meanwhile, Fitch Credit Ratings (Fitch Ratings) viewed the merger as likely to drive strong synergies and scale advantages to compete on data pricing, spectrum holding and network capabilities, ahead of Malaysia’s 5G national plan.

“The government unveiled its 5G national plan in February to establish awholesale network, through a state-owned special-purpose vehicle (SPV). The SPV will own crucial spectrum and the nation’s 5G core infrastructure and sell wholesale bandwidth to all operators, a move that we expect to intensify rivalry among mobileoperators.

“The focus of competition will shift from infrastructure to services, as seen in the national fixed-broadband networks in Malaysia, Australia and Singapore.

“The merged entity would become the largest domestic wireless operator, with a mobile revenue share of over 50 per cent and a 34 per cent share of total domestic telecom services, fixed and mobile, surpassing fixed-line operator TM,” it said in a statement.

While details are still scarce on possible collaboration of their assets and operations, analysts believe that both entities would prefer to keep their own spectrums with the aim of jointly improving, rather than competing against, both their 4G networks.

“Considering that 4G coverage and quality has ample room for improvement, coupled with the Jendela objectives to achieve nationwide connectivity, we opine that neither of the entities will have to return their spectrum,” Kenanga Research noted.

“With a significantly larger subs base, MergeCo looks to aggressively grow their home segment and convergence play. The MergeCo would keep both Celcom and Digi brands, which we view as a necessary step to retain its existing customer loyalty and subscriptions and a positive step in cross-selling,” it added.

More consolidations in the books

With the MyDIGITAL and Jendela plans, more consolidations could be on the books. Before the announcement of the proposed merger between Celcom and Digi, Celcom, Digi.Com and Maxis, have agreed to jointly develop and share fibre infrastructure which will facilitate faster and more efficient backhaul deployment to their base stations as well as avoid duplication.

“The collaboration could still mean a single-hop system by complementing fibre technology with microwave, which allows faster deployment.

“Even so, fibre infrastructure upgrades will accommodate accelerating internet traffic growth, especially in high-impact areas, extending 4G mobile backhaul to eventually support 5G new sites and fibre-to-home services.

“Hence, over the longer term, the operators could potentially deploy fibre broadband service directly to consumers, bypassing TM’s High-Speed Broadband and Sub-Urban Broadband networks,” the research team at AmInvestment Bank Bhd (AmInvestment) noted in a report earlier this month.

For now, as for collaboration with other major player in the telco sector such as Maxis, according to Kenanga Research, Axiata’s management have put on hold that possibility at the moment.

“However, they look to pick up where they’ve left off as soon as possible.

“Judging from an industry-wide strive towards a leaner operating model with less asset duplications, whether this deal succeeds or not, we opine that the entities will continue collaborating in rolling out infrastructures, such as fibre, where collaboration makes more sense than competition,” it noted.

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