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Business deals

Malaysia's Axiata and Norway's Telenor to merge Asia services

5G competition push regional rivals to join hands in challenge to Singtel

Axiata operates mobile services in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia and Nepal. Telenor serves Thailand, Malaysia, Myanmar, Bangladesh and Pakistan.   © Reuters

SINGAPORE -- Telecom operators Axiata Group and Telenor said Monday that they are in talks to merge Asian operations to create a combined presence in nine countries, challenging regional leader Singapore Telecommunications amid rising investment needs for next-generation infrastructure.

The two companies announced they would establish a new entity that is 56.5%-controlled by Norwegian state-owned Telenor and the rest by Malaysia's Axiata. They estimate that the new company will bring in revenue of some 50 billion ringgit ($12 billion) and net profit of 4 billion ringgit.

Those figures would come close to Singtel's revenue of 17.5 billion Singapore dollars ($12.8 billion) and net profit of SG$5.45 billion in the fiscal year ended last March. Singtel, the biggest player in Singapore, has stakes in major telcos in Thailand, the Philippines, Indonesia and India.

"If you want to be in the future ... you need to have scale to be able to compete between universal scale," said Telenor CEO Sigve Brekke at a news conference in Kuala Lumpur. "The merged entity will become one of the largest in the region, giving us the scale to continue to develop the business. In Southeast Asia, we are going to be the largest, overtaking Singtel or other regional players."

Axiata, which is 37%-owned by Malaysian state fund Khazanah Nasional, operates mobile services in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia and Nepal. Telenor serves in Thailand, Malaysia, Myanmar, Bangladesh and Pakistan. Last year, 53% of the revenue came from Asian markets.

The companies claimed that the new entity would be the biggest operator in six of the nine markets, the second in two, and the third in one.

The companies noted that one of the main reasons for the merger is rising capital expenditure for network and new technologies such as fifth-generation (5G) services. They said that the merger would deliver up to about $5 billion of cost synergies through the consolidation of assets and economies of scale.

Asian markets are increasingly competitive. In Thailand, where Telenor operates through locally listed Total Access Communication or Dtac, the number of customers dropped to 20.7 million in the January-March quarter this year, 5% down from a year ago. Analysts said the fall was due to intense competition in the market, where Advanced Info Services, a Singtel affiliate, remains the biggest player and True Corp. the second.

Even in a relatively new market like Myanmar, Telenor's business faces challenges. It had around 18 million subscribers in the first quarter of 2019, 3% less than a year ago. In 2018, the fourth operator Mytel, a joint venture between Vietnam's Viettel and local companies, entered the Myanmar market, which added more pressure to prices.

Telenor exited India in 2017 after selling its local business to the country's leading operator Bharti Airtel, following fierce competition from Reliance Industries' Jio mobile service whose launch in 2016 shook up the Indian telcos. Jio stormed into fourth-generation broadband services extending free voice calls and data at much lower rates than those offered by incumbents.

Axiata, on the other hand, booked a net loss of 5 billion ringgit in 2018 due to an impairment loss related to its investments in India.

Axiata is willing to invest more in the markets to expand its network. In Indonesia, Axiata is in the second position after state-owned operator Telkomsel, in which Singtel also holds a 35% stake. During Monday's press conference, Axiata CEO Jamaludin Ibrahim noted that "Indonesia has a lot of growth opportunity." The company has been focusing on investing in networks outside of the most populous Java Island. Axiata also plans to invest $250 million in Pakistan in the next five years.

"We need scale and synergy," he said. "The merger with Telenor may trigger industry consolidation across the region."

The new company will be headquartered in Kuala Lumpur. Axiata and Telenor said they intend to list it in Malaysia and another major exchange.

They aim to reach a binding agreement by September this year and complete the deal next year. But in a statement released on Monday, Axiata and Telenor noted that "there is no certainty the proposed transaction will result in any binding agreement or obligations on the parties to proceed with any acquisition, merger or divestment."

Trading of Axiata shares was halted Monday after reports of this news. Singtel shares dropped 2.2%, outperforming benchmark Strait Times Index's 3% decline.

Researcher Ying Xian Wong in Kuala Lumpur and Nikkei staff writers Apornrath Phoonphongphiphat in Bangkok, Yuichi Nitta in Yangon, Shotaro Tani in Jakarta, Kiran Sharma in New Delhi and Rosemary Marandi in Mumbai contributed to this story.

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