5G development

Why Asian telcos are rushing to merge their businesses

Asia’s telecommunications service providers are in a race to merge to gain scale and prepare for 5G, the next-generation communications technology that is expected to create massive new business opportunities.

A wave of consolidation has swept across Asia’s telecommunications industry in the last 18 months as telcos look to scale up in order to improve their services and edge out competitors.

Malaysia’s Axiata Group is the latest to join this merger race, announcing earlier this month that it is in talks to combine its business with Telenor’s South Asian and Southeast Asian operations.

The merger deal will not only bring together Malaysia’s largest and third-largest mobile operator but also create an industry behemoth covering nine markets including Indonesia, Thailand, Bangladesh and Pakistan.

That was a month after India’s telecom regulator gave Bharti Airtel the green light to acquire the assets of its smaller, financially stressed rival Tata Teleservices. This will be Bharti Airtel’s third telecoms acquisition in two years after it snapped up Telenor India in May last year and Tata DoCoMo in October 2017.

To some extent, Bharti Airtel has been forced into the mergers race by two of its main rivals, namely Vodafone India and Idea Cellular, which combined their operations last year to become the country’s largest telecom operator by number of customers.

And in Australia, Vodafone said it will appeal to the Federal Court after its plan to merge its local business with TPG Telecom was rejected by the competition regulator earlier this month.

RATIONALE

Many of these mergers were borne out of price pressures as user growth in the mobile industry has slowed tremendously in the region. The mobile subscription penetration rate in countries like Singapore, Malaysia and Thailand are well above 100%, implying that there are more mobile phone accounts than people who use them.

As many Asian markets become saturated, mobile operators have entered into cut-throat price wars in order to lure subscribers away from their rivals. The entry of new mobile carriers in markets such as India and Singapore have also intensified the price competition.

Forming a bigger entity through business consolidation is a good way to increase pricing power and sustain the price war.

Asia’s saturated mobile market has caused operators to enter into non-price competition and focus on improved product offerings. These include upgrading voice connection quality, speeding up video downloads and offering hassle-free social media access, among other things.

There is also a need to ramp up scale in order to have sufficient buffers of capital to fund the 5G rollout in many Asian countries, potentially creating limitless growth opportunities for an industry that once relied heavily on revenue from voice call charges.

All these require millions of dollars to upgrade existing networks, bid for 5G spectrums and build new infrastructure to support increased data traffic due to enhanced mobile broadband and internet of things (IoT) applications.

That helps to explain why telco mergers are not confined to the mobile phone space. In recent years there have been more merger cases across different sub-sectors under the broader telecommunications sector, including fixed broadband, wireless broadband, cable TV, as well as infrastructure and equipment.

Last month, South Korea’s SK Telecom announced it will merge its fixed broadband business with t-broad, the country’s second-largest cable TV-operator.

In Hong Kong, residential carrier HKBN completed last month the acquisition of the territory's second-largest fixed-line telecoms operator for businesses, WTT, in a $1.3 billion deal.

And in India, the world’s largest telecom infrastructure merger is in the works after Bharti Infratel agreed to merge with Indus Towers in a $14.5 billion deal, potentially creating an infrastructure giant with more than 163,000 towers.

WHAT NEXT

The wave of consolidation mergers is expected to continue, with Indonesia and China tipped to be the next destinations.

Consolidation among Indonesian telecom operators is highly likely after the country’s communications minister called for a reduction in the number of mobile carriers from seven to four by the end of this year.

Indonesia's mobile phone market is now shared by five operators, namely Telkomsel, Indosat, XL Axiata, Hutchison 3 Indonesia and SmartFren. That was after Bolt got its 4G license terminated by the government and Barkie Telecom pulled out of the retail market last year due to debt problems.

Telecom analysts expect one more mobile carrier to be consolidated in order to meet the government’s target.

The share prices of Indosat and SmartFren both more than doubled in the first two months of this year on speculation that the two mobile operators could merge their businesses.

In a research report published in April, DBS raised the possibility of a merger between Hutchison 3 Indonesia and XL Axiata, confirming a M&A idea FinanceAsia raised two years ago.

There is also speculation around a possible merger between Indosat and Hutchison 3 Indonesia.

Consolidation is tipped to occur in China too, where the telecom industry is fully controlled by the government.

Analysts believe a mega-merger between China Unicom and China Telecom, two of the country’s three wireless carriers, is a likely scenario as the country aims to speed up its 5G development.

After all, many telecom experts believe the optimal number of mobile operators stands at two or three. As such, telecom mergers are likely to continue in countries where there are more than three mobile operators, including Singapore, Malaysia and Thailand.

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