Maybank IB views Dialog’s merger with Airtel Lanka as an overall healthy market development, while generating longer-term synergies. However, there are integration costs to be borne which could defer Axiata’s net profit recovery in the initial years. The house said it continues to view Axiata’s overall risk reward as being positive, with net profit recovery and balance sheet repair being potential re-rating catalysts. Reiterate BUY with an unchanged MYR3.50 SOP-based TP.
Merger to proceed
Recall Dialog Axiata had entered into a binding term sheet to merge with Airtel Lanka in May 2023. Dialog has now entered into a Share Sale Agreement (SSA) to acquire 100% of Airtel Lanka, via the issuance of 952.7m new Dialog shares (representing 10.4% of Dialog’s enlarged share base). Axiata’s stake in Dialog post-merger would be diluted to 73.7% (from 82.3% currently pre-merger). The transaction has been approved by Sri Lanka’s telecom regulator, but is subject to Dialog’s shareholders’ approval and completion of specific conditions in the SSA.
Initial integration drag for Dialog?
The transaction would see the largest operator (Dialog) merging with the smallest (Airtel Lanka, currently loss-making), with the aim of achieving economies of scale and reducing infrastructure duplication. Maybank said 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.
The house reiterates its BUY call, as Dialog’s management will host a call this afternoon, it said would likely provide more colour on timelines and financial impact. Earnings forecasts and MYR3.50 TP for Axiata (derived from a sum-of-parts with
each op-co valued on DCF) are unchanged, with associate CelcomDigi being the largest contributor of both earnings and SOP.
