What if…Li Ka-shing bought XL Axiata?

Hong Kong’s richest man is ambitious in building a global telecom empire. Will he turn to Indonesia if the opportunity arises?

When it comes to industry consolidation, telecommunications is perhaps the most active sector across the globe.

Consolidation has already taken place in some of the bigger markets. India, for example, is set to see the merger between its second- and third-biggest mobile carriers after British communications giant Vodafone said it is in talks to combine its Indian operations with Idea Cellular.

The announcement came three years after Hong Kong’s PCCW acquired CSL New World Mobility in 2013, forming the city’s biggest mobile operator.

Market participants also anticipate consolidation in the US telecom sector after Masayoshi Son, chairman of Japan’s Softbank Group, said last week he plans to revive talks to merge his US subsidiary Sprint with T-Mobile after a failed attempt in 2014.

Indonesia is also on the verge of consolidating its telecom industry, as the government seeks to improve operational efficiency among telecom operators.

Rudiantara, Indonesia’s communication and informatics minister, said the country wants to reduce the number of telecommunications companies from seven to four by 2019, and asked smaller operators to either make bigger investments or look into merging with larger players.

That suggests that at least three telecom companies could be taken over in the next two years. Among the smaller mobile companies, XL Axiata, the Indonesian subsidiary of Malaysian telecom giant Axiata, could be the most likely candidate.

There is enough motivation for the parent to sell.

Debt reduction

For one thing, the Malaysian company is unlikely to respond to Jakarta’s calls for bigger investment since it is loaded with debt. At the end of 2016, Axiata’s total debt-to-equity ratio was 82.1%, nearly 15 percentage points higher than the 66.6% it posted a year earlier.

The company has been selling assets — including a $600 million sale of infrastructure business Edotco and another Rp3.6 trillion ($267 million) sale of its Indonesian telecom towers — to help repay its long-term borrowings, which are worth over M$15 billion ($3.5 billion).

In an interview with FinanceAsia last November, Axiata's CEO Jamaludin Ibrahim said the company has no plan to sell a stake in the Indonesian subsidiary. But that may be a different story if a strong buyer emerges and pays a good price.

WIthout serious investment, XL Axiata may be less competitive when it comes to expanding network coverage outside the Greater Jakarta area. The company could also struggle to win bids for new spectrums necessary for expanding 4G broadband services.

The Indonesian unit has struggled with net losses in two of the last three years. It returned to black with a slim profit of $12 million last year, although the company attributed that to the strengthening of the rupiah against the US dollar, as well as one-off gains from the tower sales in March.

By selling its 66% stake in XL Axiata, the Malaysian parent could raise about $1.8 billion based on current market price and could cut its debt by more than half. That could be an attractive option, but Axiata may find it hard locating a buyer for such a large asset.

CK Hutchison could be one of the few entities that is interested — as well as one that is financially capable of buying XL Axiata.

The pattern

When it comes to telecom industry consolidation, Hong Kong tycoon Li Ka-shing is perhaps the most experienced entrepreneur. The billionaire, through his flagship company CK Hutchison, currently runs telecommunications business in more than 10 markets under the 3 brand.

There is little doubt that Hong Kong’s richest man is keen to expand his telecommunications empire.

In perhaps the most anticipated corporate deals in the telecom sector, CK Hutchison proposed to acquire Britain’s biggest mobile carrier O2 for $15 billion in 2015 and to merge with its 3 UK operations.

The proposal was rejected on antitrust concerns last year, but Li was quick to go for a plan B — merging its 3 Italia business with Wind Telecomunicazioni in a $24 billion deal, creating Italy’s largest mobile company with 31 million users.

As such, it should not be a surprise if Li does the same in Indonesia.

There is a pattern when Li buys telecom assets. In his previous acquisitions of CSL and Wind, as well as the failed attempt to buy O2, the tycoon concentrated on markets where he already has operations. It is arguably the quickest way to expand market share in order to potentially benefit from pricing negotiations.

Hong Kong’s richest man is the owner of Hutchison 3 Indonesia, the country’s fourth largest mobile carrier, which he bought from Thailand’s Charoen Pokphand Group in 2007. The business is struggling to compete with larger players such as state-owned Telekom Indonesia and Indosat in terms of client reach.

Buying XL Axiata is the most direct way to help 3 Indonesia expand in the local market – a strategy that Li has used many times in other markets. Combining 3 Indonesia and XL Axiata will create the country’s second biggest mobile operator with close to 100 million users, or more than three times the subscriber base of CK Hutchison’s new business in Italy.

Li has also the financial ability to invest in telecom infrastructure and technology as per required by the Indonesian authorities.

And unlike the O2 bid, any approach on XL Axiata is unlikely to face material obstacles from antitrust regulators since the government is encouraging telecom mergers.

The one hurdle? Li is not known for investing in emerging markets. The tycoon has a clear preference for investing in developed markets such as Hong Kong, Australia and Europe, and most of his operations in developing markets remain small in scale.

In one of the most recent emerging market retreats, he sold 25% of his AS Watson retailing unit to Temasek for $6 billion in 2014. Watson runs 47 personal care stores across Greater Jakarta, West Java and Banten. In 2007, Hutchison Telecommunications (now CK Hutchison) sold its India telecom business to Vodafone and exited the world’s second populous nation.

But if he can get over his aversion to emerging markets, the deal could make a lot of sense for both parties. 

What if… is a column that analyses unusual M&A ideas in Asia. These deals might not take place — but perhaps they should. 

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media