AXIATA AND TELENOR INDIA TELECOM MARKET - What are the driving forces of the merger plan and where are the synergies? Why is Reliance Jio ...
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TMT M&A NEWSLETTER 2Q2019
AXIATA AND
TELENOR
What are the driving forces of the merger plan
and where are the synergies?
Stefano Sorrentino, Adriano Giaquinta, Rui Wang
INDIA TELECOM
MARKET
Why is Reliance Jio investing so heavily in digital
technologies?AXIATA AND TELENOR PLAN TO MERGE
THEIR ASIAN OPERATIONS
(1) Except for Telkomsel, as 4Q Norwegian-based multinational tele- largest telco group in the ASEAN and
2018 results not yet released.
Consensus estimates CY 18 com, Telenor, is in discussions to merge SAARC regions by revenue size (See
used instead. with Malaysian-based Axiata Group Exhibit 1a and 1b)]; Global Tower Com-
(2) Post merger revenue of in an all-share deal that is expected pany (i.e. the combination of edotco
MergedCo accounts for
Telenor’s DTAC, Telenor
to leave Telenor with 56.5% share of Group, the tower subsidiary of Axiata
Myanmar, Grameenphone, the merged company and Axiata with Group, and Telenor Asia assets), which
and Telenor Pakistan, as well
43.5%. is the fourth largest tower company in
as Axiata’s Celcom, XL,
Smart, and Dialog. It excludes The global merger would form three the world operating roughly 60,000
Robi and Ncell, Axiata’s distinct entities: MergedCo, the com- towers across Asia; and a Regional In-
Bangladesh and Nepal
OpCos. bination of the two aforementioned novation Centre, which would develop
companies [which will also become the innovative products and solutions.
EXHIBIT 1a
Ranking of major telco operators in the region by revenue
Revenue in Calendar Year 20181, US$ billion
MergedCo MergedCo (2) 12,50 1st
Axiata & Telenor
Single market player Telkomsel 9,12
Regional market player
(ASEAN & SAARC) Airtel 8,64
Telenor Asia 6,72 3rd
Singtel 6,00
Reliance Jio 5,76
Axiata 5,76 6th
AIS 5,28
Globe 2,88
Maxis 2,16
Indosat 1,68
Source: Axiata Investors Presentation, Value Partners analysis.
EXHIBIT 1b
Selected pro-forma financial and operational indicators of MergedCo
ESTIMATED MERGEDCO ESTIMATED MERGEDCO NUMBER OF COUNTRIES NUMBER OF COMBINED
REVENUE: EBITDA: WITH OPERATIONS: SUBSCRIBERS:
US$ 12.5 BILLION US$ 5.0 BILLION 9 >300 MILLION
2 TMT M&A NEWSLETTER 2Q2019MergedCo would be a leading player Synergies from the merger are
in Asia with operations in 9 countries expected in at least 3 areas:
cost savings, digital services, and 5G
Currently, the companies share a
presence in Malaysia and Bangladesh “The bottom line is we need the scale, we
through their Operating Companies need the synergy, we need the balance
(OpCos). However, only Axiata’s Bang- sheet, we need the strong capabilities of
ladeshi operations, Robi, are not part of both companies. If we can combine that
the proposed merger. Axiata also has it will be powerful,” Axiata group CEO
a presence in Cambodia, Indonesia, Sri Jamaludin Ibrahim told a news confer-
Lanka, and Nepal. Telenor has OpCos in ence after the initial announcement.
Thailand, Myanmar, and Pakistan. Post- Through merging the two businesses,
merger, MergedCo would have mobile not only will MergedCo be saving opera-
operations in 9 markets and be among tional expenditure and internal manage-
the top 3 operators in terms of sub- ment costs, but such savings will also
scriber share in each of these markets enable the innovation that MergedCo
(see Exhibit 2). needs to compete in the evolving telco
market.
EXHIBIT 2
Axiata and Telenor’s subscriber share by country
Axiata & Telenor Axiata Telenor Others
MALAYSIA BANGLADESH* THAILAND MYANMAR PAKISTAN
22% AXIATA 24% 22% 33% 29%
30%
50%
28% TELENOR 78% 67% 71%
46%
NEPAL CAMBODIA INDONESIA SRI LANKA
17%
41% 36% 48%
59% 64% 52%
83%
Source: GSMA Intelligence, company annual reports and presentations, Value Partners analysis.
Note: (*) in Bangladesh, only Telenor’s operations are included in the merger, Axiata-owned Robi
is not part of the merger.
3 TMT M&A NEWSLETTER 2Q2019(3) “Leveraging Digital 1. Most of the cost synergies are 2. Digital services from both companies
Technologies to achieve new
expected to come from MalaysiaCo will be integrated into a Regional
growth: how should telcos
act?”, July 2019, by Stefano but concerns have been raised Innovation Centre, but what is the
Sorrentino, Adriano on the headcount reduction digital strategy of the combined entity?
Giaquinta, Chin San Ng
[www.valuepartners.com/en/
leveraging-digital- MalaysiaCo, the combined Malaysian Axiata has a vision of being a “new
technologies-to-achieve-
new-growth-how-should- entity formed from the OpCos of the generation digital champion” by 2021,
telcos-act]. two companies (Axiata’s Celcom and focused around a “triple core strategy of
Telenor’s Digi) will be the country’s telco, digital, and infrastructure busi-
largest mobile operator, functioning as nesses,” which all have the potential
a subsidiary of MergedCo but remaining to become fully integrated and inter-
separately listed. Some estimate that connected. It currently owns Boost,
MalaysiaCo will provide approximately a cashless transaction service, ada, a
US$1 billion in cost synergies for Axiata digital advertising agency, and Apigate,
and Telenor, mainly through operational an API platform. Additionally, Telenor
expenditure savings from the removal has a heavy digital / IoT focus, providing
of duplicate network sites, sharing of IT cloud storage apps, mobile banking, and
system platforms, and rationalization of data protection services for users. Post-
sales and marketing expenses. merger, US$23.9 million is expected to
be pledged annually to fund the Region-
Given these estimates, what is the plan al Innovation Centre, which would be
to unlock the true value of these syner- responsible for integrating these digital
gies? Usually, telcos’ sales and market- solutions.
ing operations account for 20% to 30%
of the NPV of the synergy plans. However, not all digital technologies will
deliver the value that telcos seek.
However, Axiata and Telenor have A recent study published by Value
already claimed that there will be no Partners (3) shows that, for example,
forced retrenchment of Digi’s 1,700 and Media & Content, Cloud Computing, and
Celcom’s 2,700 employees, in response Cybersecurity verticals carry relatively
to concerns raised regarding the ex- higher risks, and lower synergies for
pected headcount reduction. telcos because of higher development
costs, stronger competition from non-
Further, merging two legacy networks telcos, and tightening industry regula-
into an integrated one is a complex tion, whereas FinTech, IoT, and Block-
process, and might take 3 years or more chain hold the highest synergies and
on average. The 2 telcos will therefore largest monetization opportunities.
need to manage the expectations of the Axiata’s and Telenor’s shareholders
various stakeholders affected. will expect to see a digital transforma-
Customers, for example, expect stable tion roadmap in the near future that
and consistent services throughout the highlights a joint investment strategy in
integration process, while shareholders digital technologies.
on the other hand, will push for a more
rapid disposal of excess base stations.
4 TMT M&A NEWSLETTER 2Q2019(4) Licensing basis of 3.5 GHz 3. Will the combination of technological From a financial point of view, consider-
band is for high speed
know-how and financial resources put ing the need for investments in new 5G
mobile data services
(i.e. not specified for 5G). MergedCo ahead of competitors in the spectrum license, the increasing capital
(5) Average of prices for 5G era? expenditure for network expansion and
2300 MHz, 2600 MHz, upgrades, and the need to operate a
and 3500MHz auctions.
Among all the countries that MergedCo high-power consumption 5G network,
will operate in, 5G has been listed as Axiata and Telenor might be under
a top priority in the next 2 to 5 years. substantial financial pressure.
Governments from Bangladesh, Myan- They will need to invest separately and
mar, and Cambodia have announced 5G simultaneously in multiple countries,
rollout plans, and 5G trials have already and most of the countries that Merged-
commenced in Thailand, Malaysia, Indo- Co would operate in also have similar
nesia, and Sri Lanka. timelines for 5G spectrum release plans.
Combining the financial resources and Besides, the final prices in spectrum auc-
technological know-how from both Tel- tions are unpredictable (see Exhibit 3):
enor and Axiata, MergedCo should be well prices of certain frequency bands could
equipped to win the race in the 5G era. vary significantly due to competition,
However, like any other operator, the the number of bidders, different auction
combined entity will be facing numerous structures and auction types, spectrum
issues surrounding 5G. scarcity in the country’s telecom sector,
operators’ financial constraints, etc.
EXHIBIT 3
Overview of 5G spectrum prices
Mid-band (1-6 GHz) spectrum auctions, final prices, USD / MHz / Pop / Year
MHZ
350 200 150 280 200 120 50 390 200 125 390
SOLD
~0.021
~0.020
~0.018
~0.008
~0.007 ~0.007
~0.002
~0.003 ~0.003 ~0.003
~0.001
IRELAND CZECH UK SOUTH KOREA SPAIN MEXICO LATVIA FINLAND ITALY AUSTRALIA SAUDI
REPUBLIC (4) ARABIA (5)
AUCTION MAY 2017 JUN 2017 APR 2018 JUN 2018 JUL 2018 AUG 2018 SEP 2018 OCT 2018 NOV 2018 DEC 2018 JAN & MAR 2019
DATE
Source: ITU, European 5G Observatory, GSMA, Bloomberg, AGCOM, TeleGeography,
Value Partners analysis.
5 TMT M&A NEWSLETTER 2Q2019Moreover, 5G spectrum investments are What does it take for Axiata and
likely to include strict network obliga- Telenor to successfully merge their
tions. Often times, regulators release businesses?
certain spectrum bands under the
condition that operators deploy their 5G “No merger will be successful without a
network within a tight timeframe, or that mutually shared vision and plan for how
they reach a target population coverage to integrate the businesses”. Telenor
(e.g. in Hong Kong such obligations are CEO Brekke acknowledged that integra-
clearly stated ahead of the auctions), tion risk and differences in organization-
increasing financial pressure on telcos. al culture are a concern. Post-merger,
MalaysiaCo would be expecting a blend
of cultures, governance, management
styles, technologies, etc.
Mergers and acquisitions are a vital
means to grow a business quickly, yet
many M&As fail to create shareholder
value. Shareholders of both parties ex-
pect them to set clear directions for the
deal (by defining objectives, philosophy
and principles of the merger), lay out a
clear plan to unlock value from the syn-
ergies, design a well-balanced corporate
governance structure for the combined
entity, and reach a shared understand-
ing on 5G opportunities.
Mergers and acquisitions
are a vital means to grow
a business quickly, yet
many M&As fail to create
shareholder value.
6 TMT M&A NEWSLETTER 2Q2019ANOTHER INVESTMENT IN A TECH
STARTUP BY RELIANCE JIO
In April 2019, Indian mobile operator The Haptik acquisition is part of Reli-
Reliance Jio acquired 87% of the Indian ance Industries’ broader strategy to
startup Haptik, which was founded in drive the transformation of the digital
2013, for approximately US$100 mil- lives of Indian consumers by providing
lion. The startup delivers conversational them with a 360 degrees service across
AI services to more than 100 million connectivity, e-commerce, media, enter-
devices, and has processed more than 1 tainment, financial services, education,
billion interactions so far. Reliance Jio, a agriculture and healthcare.
subsidiary of the conglomerate Reliance
Industries, first entered the Indian mo- To drive this transformation, Reliance
bile market in 2016 with an aggressive has set three main objectives: enrich its
marketing strategy, offering free voice digital portfolio (which already includes
calls and free 4G data. Today, Reliance AI services, music streaming, logistic
Jio is India’s #2 telecom operator behind services, and computing software
Vodafone-Idea, with over 300 million services), strengthen its e-commerce
customers, and capturing about 26% of strategy and positioning in India, and
the subscriber share (see Exhibit 4). achieve technological leadership.
Digital proposition
Objective #1 – Enrich digital portfolio
EXHIBIT 4
Indian mobile subscriber share by player, as of March 2019 Besides Haptik, over the last 3 years,
100% = 1,162 million mobile subscribers Reliance Industries has been acquiring
majority stakes in several other digi-
tal startups, including Saavn, a music
streaming service, and Reverie Lan-
OTHERS
16% guage Technologies, a language service
that aims to create equality on the
26,3%
Internet (see Exhibit 5 next page).
With these acquisitions, the company
aims to enrich its digital portfolio by
24,4% leveraging the growth in digital content
consumption in India, which is driven by
media, entertainment, and gaming.
33,3%
Source: company reports, news articles, Value Partners analysis.
7 TMT M&A NEWSLETTER 2Q2019The data below are a testament to this Digital proposition.
growth: Objective #2 - Strengthen e-commerce
• By 2020 India is expected to become Recently, Reliance Industries has been
the 2nd largest video-viewing audi- focusing on strengthening Reliance Jio
ence globally, driven by the increas- and Reliance Retail’s core capabilities,
ing adoption of mobile services (90% with the ultimate goal of uniting them
of watch-time happens on mobile to create a new e-commerce platform
devices) that combines the customers and data
of Reliance Jio with the offline exten-
• Revenues from digital music account sion of Reliance Retail. Reliance Jio has
for more than 70% of the whole been defined as the highway that will
music industry in India make the development of the digital
ecosystem possible, and mobile-based
• Online gaming is set to grow to US$1 software as a service (SaaS), big data
billion in 2021 (vs. US$ 290 million in analytics, AI and automation tools, cloud
2016) services, and blockchain technologies
will be the pillars of this ecosystem.
EXHIBIT 5
Reliance Industries’ Acquisitions of AI-based and technology startups
COMPANY YEAR SEGMENT TOTAL INVESTMENT STAKE
JUNE 2016 AND AI (FLEET MANAGEMENT, AUTOMOTIVE, US$24 MILLION 37.4%
SEP 2018 SECURITY, SURVEILLANCE)
MARCH 2018 MUSIC DIGITAL US$104 MILLION 81.7%
STREAMING
APRIL 2018 AI-BASED EDUCATION US$180 MILLION 72.7%
PLATFORM PROVIDER
FEBRUARY 2019 LANGUAGE TECHNOLOGIES US$28 MILLION 83.3%
DEVELOPMENT (VOICE TECH)
FEBRUARY 2019 HIGH-PERFORMANCE COMPUTING (HPC) US$31 MILLION 83.0%
SOFTWARE SIMULATION SERVICES
MARCH 2019 LOGISTICS SERVICES US$20.6 MILLION 83.0%
PLATFORM
MARCH 2019 SOFTWARE SOLUTIONS WITH SPECIFIC US$11.5 MILLION 82.0%
FOCUS ON PHARMA SECTOR
APRIL 2019 CONVERSATIONAL AI US$100 MILLION 87.0%
PLATFORM
Source: Company reports, news, Value Partners analysis.
8 TMT M&A NEWSLETTER 2Q2019With its AI conversational services, the Digital proposition.
acquisition of Haptik is set to strengthen Objective #3 – Establishing techno-
Reliance’s e-commerce strategy and fuel logical leadership
the creation of a digital ecosystem.
The Haptik acquisition also reinforces the
On paper, there could not have been a company’s attempt to establish techno-
better time for Reliance Jio to further logical leadership in India, where the low-
invest in e-commerce – the market in ARPU environment (see Exhibit 6) makes
India is expected to grow to US$200 bil- it tough for operators to compete only
lion by 2026 (vs. US$38.5 billion in 2017), on core telecommunication services.
retail e-commerce sales show an 18%
CAGR over the next few years, and new By establishing itself as a technological
e-commerce regulations aim to protect leader, Reliance Jio might justify a price
domestic players, by banning Foreign Di- premium (vs. other competitors whose
rect Investment (FDI) in inventory-driven propositions are mostly around core
e-commerce models and prohibiting e- telecommunication services), capture a
commerce firms from pushing merchants larger share of wallet from its existing
to sell exclusively on their platforms customers (e.g. by offering new value-
(which was Amazon’s and Flipkart’s added digital services), and acquire new
model for some product categories). customers (through a more appealing
value proposition).
EXHIBIT 6
India: mobile market blended ARPU
MONTHLY RELIANCE JIO ENTERED
BLENDED THE MARKET AND OFFERED
ARPU, INR FREE MOBILE SERVICES
200
196
156
174
130
104
89
JUN 2013 DEC 2013 JUN 2014 DEC 2014 JUN 2015 DEC 2015 JUN 2016 DEC 2016 JUN 2017 DEC 2017 JUN 2018 DEC 2018
Source: BMI Research, Company annual reports, Value Partners analysis.
9 TMT M&A NEWSLETTER 2Q2019So far, this strategy has paid off: Reli- One of Haptik’s applications might be
ance Jio has the highest ARPU (INR 130 within cost centers such as customer
per month in December 2018, vs. Airtel’s care, which hold the largest digitaliza-
INR 104 and Vodafone-Idea’s INR 89); tion opportunities for telcos. AI-based
the lowest churn rate of the industry (at customer care services would help
0.75% per month); an industry-leading Reliance Jio cut customer-care related
EBITDA margin of 39% (during FY 2018- costs by at least 10%, based on compa-
19); and a healthy customer engagement rable experiences. To achieve a suc-
(average data consumption per user per cessful transition towards a high-tech
month of 10.9 GB, and average voice customer care model, Reliance Jio must
consumption per user per month of 823 ensure the incorporation of 3 key suc-
minutes). cess factors: digital mindset across the
organization, buy-in of key stakehold-
ers within the organization, and strong
But will Reliance be able to deliver engagement from the IT department
tangible value from its digital to integrate new digital solutions into
businesses? legacy systems.
As we have seen, most macro factors in Haptik might also be able to boost the
India look favorable. Demand for digital adoption of Reliance’s e-commerce
services is booming. E-commerce services (similar to what Alexa did for
is on the rise. Online retail sales are Amazon). However, in the e-commerce
expected to grow double-digit. Cutting- space, the company will face tough
edge technologies such as AI have the competition from Amazon, which
potential to expedite the adoption of claims over 150 mn registered users and
new digital services and enhance the monthly traffic of 365 mn visits – and
customer experience. However, in India, Flipkart (invested by Walmart last year),
willingness to pay for digital services which has 100 mn registered users
remains low at this moment, and Reli- and 221 mn monthly visits. Despite
ance Jio might need to wait longer than unfavorable regulations, both players
expected to see its digital businesses are well-positioned to fight any new
delivering tangible value. entrants and are not new to defending
their footholds in foreign markets.
Given these circumstances, when and
how will Reliance generate tangible
In India, willingness to pay value from its digital investments? What
is the plan to unlock the true value from
for digital services remains the recent acquisitions? Before closing
another deal in the tech space, Reli-
low, and Reliance Jio might ance should share how much value the
company has created from its previous
need to wait longer than acquisitions. Its shareholders would
definitely appreciate that.
expected to see its digital
businesses delivering tangible
value
10 TMT M&A NEWSLETTER 2Q2019ABOUT
Published by Value Partners is a global management valuepartners.com
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Written and edited by: associations, service providers, and
Stefano Sorrentino, strategic investors. Stefano Sorrentino
Adriano Giaquinta, Partner, Hong Kong office
Rui Wang We also possess one of the largest TMT stefano.sorrentino@valuepartners.com
practices worldwide, as we collaborate
For more information
with the leading Telecom, Media, and Adriano Giaquinta
on the issues raised in
Content players globally, on projects that Engagement Manager, Hong Kong office
the report please contact
span the full universe of telecom & media adriano.giaquinta@valuepartners.com
the authors
technologies – fixed, wireless, broad-
If you would like to subscribe band, satellite, broadcast – and range Rui Wang
or to be removed from our from customer segmentation, to product Associate, Hong Kong office
mailing list please write to: launch, market entry, strategic alliances, rui.wang@valuepartners.com
research.asia@valuepartners.com and M&A.
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