Malaysia’s Axiata buys Nepal’s Ncell for US$1.37 billion

Kuala Lumpur / DPA

While companies are holding tight to cash, Axiata Group Bhd is going against the grain with the purchase of Nepal’s No.1 mobile operator, Ncell Pte Ltd, for US$1.37 billion.
We have been eyeing that market for two years but we only got really serious in the past few months,” Axiata group chief financial officer Chari TVT said.
He pointed out that the acquisition provided growth potential at an attractive valuation and was within the telco’s
targeted footprint.
Axiata announced that it was acquiring a 100 per cent stake in Reynolds Holdings Ltd from Telia Sonera UTA Holdings BV and SEA Telecom Investments BV for US$1.37 billion. The acquisition of Reynolds gives Axiata an 80 per cent stake in Ncell.
Axiata, the regional mobile player with over 260 million subscribers, said the acquisition of Ncell met many of its investment criteria. This included it being a brownfield investment (existing business) which gave Axiata management control and was in a growth market. The deal was done at an attractive valuation and will be earnings accretive, added Chari.
TeliaSonera, a Swedish telecom group had announced its plans to reduce its presence in seven ‘Eurasian’ markets, in reference to investments in Asia and Europe.
Last Wednesday, Axiata received strong support from shareholders at an EGM with 99.9 per cent voting for the acquisition. The proposed acquisition in Ncell is subject to conditions, and the transaction is expected to close by the first half of 2016.
Analysts said the acquisition would provide an immediate accretion to Axiata’s financials and the valuation was reasonable. They said the deal merits far outweighed the risks.
Based on Axiata’s FY15 pro forma revenue, earnings before interest, taxes, depreciation and amortisation (Ebitda) and profit after taxation and minority interests (Patami), Ncell would provide an
uplift of 11 per cent, 19 per cent and 13 percent, respectively.
Analysts said the acquisition would also reduce Axiata’s reliance on Celcom Axiata Bhd as Ncell is expected to be one of the largest Patami contributors to the group.
Kenanga Research expected Ncell to contribute 1.3 billion ringgit (US$308.9 million) turnover and RM654mil Ebitda to Axiata in FY16.
Ncell has a strong cashflow generation with an operating free cashflow of over US$217 million per annum and cash balance of US$307 million. The strong cash flow would further support Axiata’s dividend paying policy.
Analysts said that’s that the price tag for the deal, which is at a trailing enterprise valuation over earnings before interest, tax, depreciation and amortisation (EV/Ebitda) of 5.0 times is attractive, considering that it also gives Axiata contol over the Ncell.
Ncell is the market leader in a duopolistic mobile market with 13 million mobile subscribers, representing 48.8 per cent subscriber market share and has a
revenue market share of 57.5 per cent.
Moreover, Nepal has favourable market dynamics and Ncell has been gaining market share.
Nepal’s economy has grown by a compound annual growth rate (CAGR) of 4.2 per cnet over the past six years with a young population where an estimated 68 per cent of its 28 million is below the age of 35. Its mobile industry landscape is essentially a two-player market with a mobile penetration of unique subscribers of 51.1 per cent and mobile broadband penetration of 21.5 per cent, with 33.1 per cent CAGR in Internet subscribers from 2012 to 2014.
Ncell also holds a sufficient and good mix of spectrum portfolio including paired spectrum of 8MHz of 900MHz, 11MHz of 1800MHz and 10MHZ of 2100MHz spectrum.

According to presentation materials from Axiata, there are about one million Nepalese in Malaysia, representing opportunities in intra-Asean international calling and mobile remittance.

This would capitalise on AxiataÂ’s strength in the overseas foreign workers segment of the south Asian markets.

Apart from the acqusition of Ncell, Axiata has also signed a definitive agreement with Bharti Airtel Ltd to merge their respective telecommunications units in Bangladesh, Robi Axiata Ltd and Airtel Bangladesh Ltd.

The acquisition of Ncell, however, could raise AxiataÂ’s gearing to 0.91 times from 0.67 times.

Axiata’s Chari said the group’s borrowing would increase given the acquisition of Ncell. However, he said the group had three to four “action items” to bring its net debt to Ebitda down and it would not go beyond 2.5 times. Its net debt to Ebitda stood at 1.49 times in FY15. It has some RM5.5bil cash.

The company recently announced a dividend of 12 sen a share for the fourth quarter ended Dec 31, 2015, bringing the total dividend for FY15 to 20 sen.

However, this was lower than the 14 sen a year and total dividend of 22 sen for FY14.

According to Standard & PoorÂ’s (S&P) Ratings, the acquisition will weaken AxiataÂ’s financial ratios but it remains within expectations. Despite the expected weaker financial ratios, S&P said its ratings on Axiata were unaffected by the companyÂ’s proposed acquisition of Ncell.

The rating agency said it estimated that the proposed acquisition would increase AxiataÂ’s pro forma debt-to-Ebitda to 1.9 times, from 1.6 times now.

It added that the ratio would remain below its downgrade trigger of over 2.0 times on a sustained basis.

In FY15, Axiata posted a revenue of 19.88 billion ringgit, up 6.2 per cent from the 18.71 billion ringgit of a year ago. Its earnings rose 8 per cent to a record 2.55 billion ringgit from 2.36 billion ringgit a year ago.

AxiataÂ’s Ebitda grew by 4.1 per cent to 7.3 billion ringgit, with an Ebitda margin of 36.6 per cent.

Meanwhile, AxiataÂ’s shares have been under pressure. Year-to-date, it is down 6.4 per cent, underperforming the benchmark FTSE Bursa Malaysia KLCI.

It closed unchanged at 6 ringgit last Friday.

Analysts say the 5.7 billion ringgit deal merits far outweigh the risks.