Malaysia’s Axiata merger with Bharti Airtel of India raises earnings concern: Analysts

KUALA LUMPUR, April 19 (The Edge Malaysia): The planned merger of Axiata Group Bhd, Malaysia’s largest telecommunications company by revenue, with India’s Bharti Airtel Ltd raises concerns as the latter's subsidiary Airtel Lanka is currently a loss-making company, analysts said.

Airtel Lanka recorded a net loss of around RM245.4 million for its financial year 2023 (FY2023), according to TA Securities in a note on Friday.

"Therefore, Dialog will be subject to earnings volatility if Airtel's earnings performance falls short of expectations," said the research firm.

On Thursday, Axiata Group Bhd’s 83%-owned Sri Lankan subsidiary, Dialog, entered into a definitive agreement to acquire the entire issued shares of Airtel Lanka (Airtel), a wholly owned subsidiary of Bharti Airtel.

The purchase consideration is satisfied via the issuance of 952.7 million or 10.355% of new Dialog shares to Bharti Airtel.

Meanwhile, Kenanga Investment Bank said upon completion of the merger, Axiata's FY2024F net debt to earnings before earnings before interest, taxes, depreciation, and amortisation (Ebitda) will increase slightly to 2.36 times (from 2.23 times). 

"Earnings drag from Airtel Lanka may not persist for long. To recap, Dialog contributed 20% to Axiata’s FY23 normalised Patami, ” it said in a note on Friday.

The research house anticipated Dialog may narrow Airtel Lanka’s Ebitda through costsavings from an integrated network, sales and marketing channels, and other administrative expenses.

Notably, Dialog Axiata is the largest telecom service provider in Sri Lanka, with more than 17 million subscribers, while Airtel has around five million subscribers.

Kenanga Investment Bank said the merger will enable Dialog Axiata to further consolidate its leading market share in Sri Lanka and secure a portion of Airtel Lanka’s 75MHz spectrum across the 850MHz to 2.6GHz bands.

“This may translate to capital expenditure savings for Dialog when rolling out both 5G and its home broadband services that rely solely on wireless technology,” the research house said.

Echoing the sentiment, Maybank Investment Bank Research added that the transaction would see Dialog, as the largest operator merging with the smallest, Airtel Lanka to achieve economies of scale and reduce infrastructure duplication. 

"In our view, the transaction resembles that of Bangladesh, where Robi Axiata and Airtel Bangladesh had explored and completed a merger in 2015-16. The enlarged Robi endured a few years of losses during the integration phase before enjoying the longer-term synergies," it added.

Analysts covering Axiata have all maintained their rating with ten having a “buy” recommendation, followed by "ten hold" ratings, and the remaining five having a “sell” call. The 12-month target price is RM2.75. 

Shares of Axiata Group were traded higher by about 0.39% or a sen to RM2.56, valuing the company at RM23.51 billion