Ladies and gentlemen, thank you for standing by, and welcome to the Axiata Group's conference call. Throughout the presentation, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. Firstly, two housekeeping reminders. Please mute your phone during the presentation, and kindly avoid using wireless headsets. Today, the conference call will be hosted by Tan Sri Jamaludin, Group CEO, and Vivek Sood, Group CFO. I would like to turn the conference over to the speakers. Please go ahead.
Thank you. Thanks for joining us. My name is Jamal, and Group CEO for Axiata. Yes, today, we are announcing the mega merger between the two companies. Well, actually, it's the injection of the assets of two companies into a new merged co-entity. Let me just go backtrack a bit. If you can look at slide two, this has been a vision for the company. That's a bit of history. The demerger in 2008, and then we built a digital company. We created a regional champion, and as of today, we are moving into Axiata 3.0, into a new generation digital company.
If you look at point five, this has been our triple core strategy, how we want to transform the digital telco into a broadband company, into a converged company, how we want to transform the digital businesses into three unicorns, and how we want to transform infrastructure into a global-scale company. The merger, I will go straight to the merger. This is a very heavy chart, the next chart. Slide. Yeah. Okay. Well, the way to look at the merger is there are three components. From a national perspective, what does it mean for the shareholders' perspective, the commercial side, and how do we run the business? From the national perspective, we are creating four entities. One entity is the global entity, International Merged Co, which is basically the new entity that will be formed by injecting Telenor Asia assets and most of Axiata assets.
Effectively all, minus India, Robi, and ADS, which I will explain later on. That will be the International Merged Co. Pro forma revenue of this company will be MYR 50 billion, EBITDA MYR 20 billion, and CAPEX of MYR 4 billion. It's arguably the largest telco in the region, but definitely the largest in terms of revenue, but also in many others, too. We will be operating in nine countries, and 6 being number one. That's the International Merged Co. The second company will be the merger of Celcom and Digi. That merged company will have a pro forma revenue of MYR 14 billion and EBITDA of MYR 5 billion, and obviously, will be the largest in Malaysia. I will explain more about that later on. The global telco, edotco itself is the 13th largest in the world.
If you cap out the rest of the towers in Telenor Asia’s footprint and our own, the remaining towers in our own operation, potentially, it could be the top five largest in the world. That might take, obviously, one, two, even three years. Directionally, that can be done much earlier compared to what we could have done otherwise. One of the other features of the deal is to create the largest innovation center, where we will invest to the tune of average of MYR 100 million per year. That will be focused on new technologies, 5G included, IoT, artificial intelligence, robotics, so on. We believe that this deal, while commercially attractive, will also support the national aspiration of the country. The graph on the whole presentation will be more on what does it mean to the shareholders, right?
If you look at the center, it is like I said, the mega merger of its kind. The biggest one is that the synergy that we are looking at will be to the tune of MYR 15 billion-MYR 20 billion combined for the merged company. Our share will be accordingly the 43.5% of that amount. What is interesting also, the company will have a firepower to potentially bid large headroom that we can fund our mobile, especially Indonesia, broadband, and other non-traditional businesses that we had wanted to do. Related to that, on top of that, rather, we expect the free cash flow to be very significant and allow us not only the funding, but to give a very good dividend to the shareholder. The last point is in relation to the previous chart, where once combined, we will accelerate the Axiata 3.0 to 4.0, becoming effectively global champion.
While the shareholding, as you can see in the announcement, is Telenor 56.5 and Axiata 43.5, the agreed concept of running the business is the spirit of merger equals. Basically, we agreed that we will form a company, as mentioned earlier, as a merged entity. More importantly, we will run this professionally as a board run company. So the professional board, although majority appointed by Telenor and the rest are Axiata to reflect the shareholdings, but it will be run not subservient to any other operations. It will be done and decided everything by the board of this company.
Related to that, the board and all management positions within the group will, especially the new merge co and the Malaysia co, which is the merger of Celcom Digi will be determined jointly, both the board and management, and with the concept of where the best man wins or the best person for the job, and to be decided jointly. It is envisioned that all opcos will continue as is. In other words, all the CEOs and CXOs, all the remaining operating companies, we don't expect any change. The following chart shows the pro forma revenue and profit and number of customers assuming we were to merge. As you can see from this chart, by combining the two operations or assets and assets, we will leapfrog to be number one, the largest in the region. Basically, the region is defined as Southeast Asia and South Asia.
In a profit standpoint, it will be definitely top three in the region, and customers top three. For Malaysia, the next chart, the combined revenue pro forma will be MYR 14 billion, and EBITDA MYR 5 billion, with a total customer of 31 million. Of course, in reality, one plus one is not going to be equals two, because of the duplicates in the customer base. Still, we expect this to be the largest. If you look from a converged perspective, in other words, you include TIME dotCom , we expect to be the pro forma of roughly 35% of the revenue market shares.
The next chart, apart from the international merge co being formed, the new Malaysian champion of merge co being formed, we also will create the top five largest global telco, as mentioned earlier, by combining edotco, which has about 19,000 sites and about 12,000 or 13,000 operated sites. You combine them with Telenor Asia, if you manage to recover, it will be roughly to the tune of 50/60. If you look at the total towers that we have, combined, it's actually about 18,000. We do assume that some, for whatever reason, might not be able to count out, and therefore the more conservative number of 50 to 60. From the investor perspective on the next slide. Next slide.
The big feature of this deal, as mentioned earlier, is a very strong balance sheet to fund the growth in Indonesia, Thailand, and many other new areas that we want to go into, especially home. By increasing the debt headroom or the cash flow. The second advantage is, of course, related to the first. We can fund now the new growth of the company, but the company itself is in the right area or right geography where there's still growth left. The third advantage, of course, is the cost synergy and avoidance, especially when you look at the cost in Malaysia, where combining Digi and Celcom, we do see huge synergy because of cost synergy and avoidance.
Of course, we have the sharing of best practice or practices between the two companies, which of course, we have different business models, but the idea is to pick the best of both worlds. Last but not least, we believe that we will be extremely attractive to attract the best people in the industry in this region and also to retain them. The next slide shows the Telenor group, which most of you are familiar. I'll skip the equity story because that will be mentioned earlier, but let me stay on for a while. The equity story, the plan is for the merge co, within the next one, two, or three years, because we cannot determine the years yet, will be listed. Malaysian company, Celcom will be injected in Digi, therefore will be listed significantly a large company.
Of course, eventually, the TowerCo will be listed. We have four champions we're going to create, three of which might be a listed company. You can see the size we're talking about. It's pretty big. The synergies are very big. I mentioned about the firepower. Last but not least, it's a pretty unique portfolio. In fact, I can't even imagine any portfolio comes close to us in this part of the world. It's extremely unique portfolio. The next chart shows the five core synergies area. This is where the MYR 15 billion-MYR 20 billion come from, is this next chart. Yes. Predominantly will come from Malaysia, where the combination of CapEx avoidance because of network, the spectrum, the OpEx efficiency will of course lead to the core area. Procurement also, it is envisaged that we will combine our procurement team and will be highly centralized.
We mentioned about TowerCo. The market, the value uplift because of the TowerCo will be significant. Of course, the HQ will be consolidated. They have the HQ in Bangkok, we have in Malaysia. They have also one in Singapore. It will be consolidated into one, maybe two still, but for sure consolidated. Of course, the benefit of wholesale. That's how we have quantified. The next slide shows the other benefits or the other areas or synergies which we have not quantified, from analytics to the software center that Axiata has already, enterprise and so on and so forth. The last chart shows what the entity will look like. There will be nine companies, six number 1, two number 2s, and three number 3. In summary, the last slide, maybe I can ask Vivek to talk about the summary, the key feature announcement.
This is just the key features of the announcement we've made. Which is basically the first one is clearly the global champion combining the operations of Telenor Asia and Axiata, excluding Robi. Intention is to list this merge co in Bursa and another major stock exchange, to create a global TowerCo, to set up a regional innovation center in Malaysia, which Tan Sri talked about. Potential synergies of MYR 15 billion-MYR 20 billion. The shareholding reflects the relative value of the assets, which is split as 56.5% for Telenor and Axiata will own 43.5%. We expect the binding agreement, after the proper due diligence process, to be completed by quarter three 2019. This is both more of an estimated plan, but the intention would be to do that based on these timelines. That's it. We can open the go for Q&A.
Thank you for that. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press pound or hash key, followed by digit 2. We'll take the first question from Piyush Choudhary from HSBC. Your line is open. Please go ahead.
Hi, good afternoon, and congratulations for this mega deal. Firstly, if you can talk about the timelines or/and the regulatory milestones which we should consider particularly in Malaysia, Indonesia markets. Secondly, if you can delve a little bit more on how the valuation ratio was arrived at. Thirdly, if I may, you've talked about the listing of the merged entity in international market. Who will sell the shares into such a listing?
On the first one, just to give you a feel of timeline. I'm glad you asked because I forgot to mention that this is, in a way, a premature disclosure or announcement. As you know, normally for Axiata at least, we only announce at the point of signing, not upon any kind of discussion. This is a bit premature. We expect from this today to sign, assuming everything goes well, within a period of three months. It was six months, but we are targeting it to be three months. After the signing, we expect the whole approvals to be done within the next six to nine months after that. We're looking at a possibility of third quarter for completion, provided everything goes well. The kind of milestone on the post-signing will of course include the regulatory approvals. We do not foresee significant issues in most countries.
But of course, in Malaysia, the biggest work to be done is with regards to approving the merger of the two companies. That will be perhaps most of the work to be done. The rest should be quite straightforward. In terms of from now till signing, there are a lot more work to be done and to be determined. We've then includes, among others, the whole how we want to run this company, which has not been completely detailed in terms of board management and all that. Even for the board, for management, we will decide the whole entire lineup of the merged co CEO, CXOs and all the companies, including the Malaysia co, before we sign. Of course, there are many other points to be discussed. Those are the kind of things to be done. In short, from now till signing, three months or so.
From signing to completion, six to nine months. On the second question, of course, we are not at liberty to that. Obviously, we did look at SOTP as one angle to look at it. We look at our share price in the past, in the future, and so on. Those are the considerations and, of course, the synergies. Those are just the considerations but of course, we are not at liberty to explain exactly how they are being derived at. On the listing of merged co, of course, there's no discussion whatsoever has been done, exactly how, who will sell shares and all that. It's very premature to even talk about that. More importantly, our focus right now is not about IPO because it will be a long time from now, frankly.
Our focus upon completion is to work on the integration at all levels, primarily Malaysia co with Digi and Celcom, and the holdco. Of course, the procurement center, the analytics group, and so on. There's a lot more to it to be done. That will be our prime focus of the post-completion. In fact, some of this work will be done even pre-completion.
Thank you. I'll come back in the queue.
Thank you, Piyush. We'll take the next question from Wei Shi Wu from BNP Paribas.
Hi. Good afternoon, and thanks for the opportunity to ask questions. My question, first one is with regard to how we should be looking at the Axiata list co, especially if the intention is to eventually IPO the merge co. The second question is, I know you still commented on sort of the plans for Robi, but is it reasonable to assume that Robi will be continued to be held by Axiata given the developments? Then, I also wanted to get your thoughts regarding some of the initial feedback you've gotten from MCMC regarding the merger of Celcom and Digi, and whether you can give us any comments around what conditions you think might be placed on the transaction for it to go through. Thanks.
Okay. On the first question, obviously we are far from concluding what is the end result of this whole thing, because even the IPO, the timeline has not been decided. We can't really answer the question. Axiata role, obviously, pre and post-completion is to ensure the integration is done correctly and well, and to harness all the synergies that we just talked about. That's about all I can say right now. On Robi, yes, it will be continued after the completion under-
Okay
Axiata directly. Of course, this is yet another area. We have looked at a few possibilities and alternatives, but we have not really come down to any kind of a decision. Long way to go, I think, and we have a lot more time anyway. On the last question, all I can say is that we have informed them. At this point, there's no comment. Before that, we have not spoken to them, so therefore we have not gotten, to be fair, there's no discussion whatsoever before today. We only informed them today. We don't know yet, because like I said, this is still at the discussion stage, not even at the completion stage. Not even at signing stage.
Thank you, Jamal. Can I just follow up? Some of us have just come off the call with Telenor CFO, and he expressed optimism that there will not be any significant issues with regard to the Malaysian regulator. It's kind of new that you're saying that you've only just informed them today. Any comments there?
Well, I guess if you look from on paper, we have a very strong case. I guess in that respect, I resonate with their view, there shouldn't be, because we have a very strong case. If you look from a converged today, in today's world, people don't look at the mobile as the mobile industry anymore. We are now in a converged company. We compete with a fixed line, fixed line compete with us. If you look from that point of view, yeah, we think that we have a very good case. Not only that, if you think about it, consumers have a lot of choices. In fact, if you look at broadband itself, 70% of usage of data is not even within the mobile companies. 70% is Wi-Fi, right? Actually, the mobile companies are sharing whatever is left, the 30% of the pie.
If you look at voice, in terms of calls, even voice, all the mobile company combined is less than half. Majority is Skype with WhatsApp and all other choices. Consumers have a lot of choices. Just to give you a feel that if you look at logically, there shouldn't be issues.
Great. Thank you very much.
Thank you, Wei Shi. We'll take the next question from Thien Do from GIC. Your line is open. Please go ahead.
Hi. Thanks for the opportunity to ask some questions. First question, you may have addressed this before, I didn't manage to get on the call early enough. Why was Robi excluded from the merge co? Second question is, what plans do you have for the minority shareholders in Digi? What happens to them? Do they end up with a stake in the MergeCo, does the MergeCo just have a majority, but not 100% stakes in Digi? The third question is, I guess, on your dealings with the regulator. What are you prepared to give up if they do have objections? The regulator will ask for something for the MergeCo to give up. What are you prepared to give up?
Okay. Before I answer your question, Thien, if you don't mind, if I can just repeat the overall context of where we are. We are still in discussion stage. This is actually a premature announcement that we have done voluntarily. What does it mean? It means that there are so many things we have not even ironed out, to be very frank. We are doing this primarily because in anticipation of leakage, but of course, it leaks out this morning by itself, and before that we have heard a lot of leakages. We are doing more because of that. From now, still finding there's a lot of due diligence to be done, and therefore, we do expect easily over 100 people involved, and therefore, the leakage is almost 100% sure. Therefore, we announce prematurely.
Because of that, it's just a preamble to many other questions we can't really answer. Number 1, we can actually, because it's pretty obvious that Robi cannot be combined with Grameenphone. It will be 80% or more in terms of the market share. It's number 1, number 2, right? Number 1 and then strong number 2. More because of that, in anticipation of that, we decided might as well we run it separately. Number 2, yeah, thanks to my preamble, we have not even talked through what to do, how to do it in terms of the IPO of Celcom versus Digi. The last one, yes, we have not crossed that path yet.
Okay. Just a follow-up question then. I understand that it's a very preliminary announcement. The merger ratio, 56.5/43.5. That's a detail which is quite far along the line of the process, right? Why have you announced such a detailed merger ratio when a lot of the details still have to be ironed out?
Very good question. To make it worth it for us, because the significant amount of time required. This is a mega merger. This is not a merger, right? Axiata itself has done in Sri Lanka, Indonesia, Cambodia, Bangladesh, and all involve one company. This is involving so many companies, so massive, and a lot of time and effort will be dealt with and money to be spent. Hence, we agreed both sides that, let's not waste too much time and the impact and the risk of the focus of the business if we cannot even agree on the valuation. Let's work on that first. Hence, we say that, okay, let's work on the ratio and agree on it, and if we said after that, okay, that makes sense, only we move to the other stages. That's how it's being done.
Final question, is there a break penalty or break clause in the contracts you signed?
Well, in the first place, we have not signed any agreement, and it's not binding. This whole thing is not binding in the first place.
All right. Thank you.
Thank you, Thien.
We'll take the next question from Alex Goh from AmBank. Please go ahead.
Yeah, thank you. I just want to return back to the ratio of Axiata's stake in the merged company of 43.5%. Can I just confirm, is this based on your share of your EBITDA in the merged company, or is it on some other parameters that have been adjusted? That's my first question. My second question is, you've indicated there would be synergies worth MYR 15 billion-MYR 20 billion over the five areas. Could I give some sense of this? Over how many years? Is this five years or 10 years that you are looking at? Just want to also double confirm, I've noticed that the India Vodafone Idea and Aircel is not mentioned in these slides that you've given us. I just want to confirm that is deliberately left out, and will those assets still be under Axiata's listing separately?
All right, the merged company will also be a different entity within Axiata Group, which will have its own listing as well. That's my second question. My third question is regarding your spectrum. How would you be able to optimize between DG and Celcom? What are the areas that you can actually I'm not sure how you can actually work that out. Also, how those, on an operating level, will the service quality and service targeting of the customers be optimized?
Okay. Thanks for the question. I can't answer in detail how the swap ratio is being done. In principle, as I mentioned earlier. It's definitely not just looking at one dimension, looking at few lenses actually. Quite complex because we triangulate with actually looking at so many other factors. Certainly not just share EBITDA. That's the simplest of them all, but way beyond that. On the second question, this is actually a present value of five years of synergy. Obviously, synergy is way beyond five years, right? What we've done, we calculated, we quantified that, and over the next five years post-completion, then we present value it. I forgot. This is one of the other areas that we spent a bit more time before we agreed it's worth it or not. One is the ratio. The other one is the synergy.
Because of both of them, we say, yeah, it is worth all the effort and time to make this happen. On the third question, yes. Ncell is within the merge scope. Idea is not. Idea and Robi and ADS are not part of the merge scope. As you know, we have effectively classified Idea as investment, not a strategic asset, and therefore might as well take it out. On spectrum, we have not come to the spectrum yet of discussion between the two parties. I can't comment on the regulatory side, how do you optimize. If you answer your question coming from the technical side, operationally, we have done that many times. All our combined spectrum in Indonesia, in Sri Lanka, in Cambodia, and Bangladesh, we have done many, many times. I dare to say that we are an expert in this area.
The Malaysia customer base, we have not reached the point where we have decided how to market. Right now we are competing. Thank you, Alex.
Okay. Thank you.
Thank you, Alex. We'll take the next question from Prem Jearajasingam from Macquarie. Please go ahead.
Hi. Thank you for the opportunity. A few questions from me. First, could I just clarify, I thought I heard you say that the merger of Celcom and Digi would essentially be Digi acquiring Celcom, which therefore keeps this as a non-cash transaction. Could you confirm that? One. On to the main questions. Firstly, why now? Why could we not have done this earlier or even later? Just want to get your thoughts around that. Thirdly, I do appreciate that it's still early days, but from a management standpoint, I recall you made a comment saying that there would be no change in the management teams, but would it not make sense that if you are merging to bring in some of that Telenor expertise into the Axiata group at all opco rather than just Celcom? What are your thoughts around that? Thank you.
Why don't we take after the first question?
Yeah, I think first question, you're right. It's basically Digi acquiring Celcom, and it's a non-cash transaction.
Sure.
The second question is a good question. In fact, I can reiterate. During the last two consecutive investors conferences, or we'll call it Axiata Analyst Day, we have been very clear that consolidation is key to our future. Now, we made that so very clear that even if we perform very well operationally, it's very hard in the long run to be sustainable if there's no consolidation in some of the countries. We've been working on this for the last two years, at least, in all shapes and form, different variations, different part of the operations, not necessarily the buyer operations. By now, as an accountant, we have spoken to serious player, serious one. There are many others. At least 10 team players we have talked to see what's the best way in the future, while of course, performing operationally well.
The why now, in a way it so happened that along the way, we managed to discuss with Telenor and find that this is probably the best combination, the best deal or combined deal compared to any other proposition that we've worked on so far. We could, of course, wait till later to some extent, but we believe the sooner we consolidate Malaysia, the sooner we invest more than we could have in Indonesia, we will be better off this way. In terms of management, I want to clarify. When I say no change, it's only those not affected outside Malaysia and outside the whole group. Right? For now. Obviously, in the long run, contracts expire, people change and all that. Of course, we will review that, but right now there's no plan to change.
You're right. It makes sense to bring Telenor expertise to the group and vice versa also. It might not actually be at the highest level.
Okay, thank you. Just one follow-up. At the end of this process, we will have a listed Malaysian entity. We will have Axiata Group as it stands today, or maybe that replaced with a merge co, which may have more than one listing, and we will have potentially the listing of a tower business. Is that the right thought process?
Okay. Before that, I just want to complete question three, just to be more precise.
Yeah, sure.
It will be a nice mix of people both in Malaysia and in the holdco, which is the merge co, right? That's where the focus right now. There's so many things to be done. The focus will be the holdco or the merge co and the Malaysia co of the combined company, Digi and Celcom. On the fourth question, you want to answer that, Vivek?
I can answer that. I think this is obviously not immediately. It's going to be in the future. Malaysia consolidated company will continue, listed. Axiata will continue to be listed. The eventual plan is to list the merge co and the TowerCo, but that timeframe of when that would happen is still to be decided.
Perfect. Thank you very much.
Thank you.
We'll take the next question from Arthur Pineda from Citibank.
Hi. Thanks for the opportunity. Several questions from me, please. If I look at your savings of MYR 15 billion-MYR 20 billion target, it appears that you don't really have any geographic overlap outside of Malaysia. Typically, when you have overlaps, that's where you generate the synergies. How do you come about getting this MYR 15 billion-MYR 20 billion target? Second question I had is with regard to the scale within the markets following the deal. Obviously, you've mentioned that as a key determinant for pushing deals. Most of the assets ex-Malaysia are also independent, and the deal doesn't create any additional scale because of the lack of overlaps. The individual assets also have no problems raising money on the local level anyway. What's the incentive to push this then? Last question I had is with regards to Axiata's existence going forward as a holding company.
If the assets are all held under a merge co and with the exception of Robi and ADS, is it still practical to keep Axiata separately running as a listed entity? It'll be a holding company holding another holding company. How should we view Axiata over the long run? Thank you.
Okay. Very good questions, actually. On the first one, if you turn to What page is this? There's the five core synergy areas. The biggest, of course, on itself is the Malaysia co, where the merger of Digi and Celcom. That's where probably to the tune of 40%-45% of the synergies, right? Within that, the biggest, of course, is the network. That's easily about 50%-60% of the synergy. It is pretty obvious. I'll come back and detail it a bit, but it's pretty obvious that's the biggest chunk. The second one is procurement. We spend about MYR 6 billion-7 billion per year. They spend about the same plus or minus. We're talking about what?
$3 billion.
3 billion.
U.S. dollar.
U.S. dollar of spend easily for both sides. We have done a bit of calculations. We also have looked at the success that both parties have made, especially credits to Telenor. Their procurement center has done a good job. With that against the yearly spend on CapEx, that's another set of synergy. The third one, what we have done is on the TowerCo, where we look at what our experience in the TowerCo over the last four years or so. We look at if we were to carve out from all the operations, what would be the value uplift that we can derive from a valuation perspective? What is the cost savings that we can derive from merging into the edotco?
We ourselves have real-life data where when we carve out all the operations, all the towers actually, from the operations, we have on OpEx easily to the tune of 10%-15% OpEx per year savings. Our CapEx easily to the tune of 15%-20% CapEx savings. We use that to see, to apply against the carving out of their towers outside the operations. What would that mean? Of course, I can go into a lot more detail, but just to give you an idea. Then to the HQ, right? They have HQ, we have HQ. To manage this whole group, which is probably more than double or double, we probably don't need the same kind of people, or we might need, again, we can support even beyond that because we are looking at a much higher growth in the future of the business.
Last but not least, we look at wholesale, looking at harmonizing our roam rates and all the things we do together. Pretty big scale involved here. Last but not least, your question on Axiata. It's a good question. We have thought about that. Of course, it's premature to declare exactly what we want to do with AGB beyond that.
I just-
Yeah. Right now, the focus of AGB or Axiata is to work with the merged group in terms of the synergy, because that is very important of our business case. Yeah, Vivek?
I'll just add that I think the purpose of this whole merger is a strong equity story and eventual potential listing over time of the merged group. At this point in time, the way we look at is if anyone wants to really enjoy the reap the benefits of long-term equity story of the merged group, Axiata would to get in. I think from that perspective, short term, yes, what you're saying may be right, but the long-term effect of the equity story benefit can come only through Axiata.
Understood. Okay, thank you very much.
Thanks, Arthur.
Thank you, Arthur. We'll take the next question from Ranjan Sharma, JP Morgan. Please go ahead.
Hi. Good afternoon. Thank you for the call. Exciting days ahead. There's a couple of questions from my side. Firstly, if you had to break down your synergies into cost avoidance versus cost savings, how would you do that? Considering also that, are we going to expect a reduction in headcount? Because that can be a political discussion as well in some of the markets. Second thing is that when you have a discussion with MCMC and looking at the antitrust regulations in Malaysia, is there a threshold that you can't go across a certain level of market share in terms of customers or of spectrum? You might have to shed some of that market share, like Vodafone Idea in India. Lastly, on the digital businesses, does Telenor have any digital business in the region? Why not combine them?
Because you're taking a lot of losses from your digital businesses. Wouldn't there be more synergies if you were to build, let's say, one wallet rather than two, three wallets? Thank you.
The first one, Vivek, you want to answer that?
Majority of it is actual cost saving. Very little would be avoidance, and I think the definition is always pretty vague. We see a large saving in Malaysia coming on account of network integration, reducing from duplicate network to one network. We see large savings coming out of procurement, which is basically about standardization of the bill of materials, as well as the price book differential between what is there with Axiata and Telenor, and also the fact that the scale would be virtually nearly two times of what individual company spends on. Most of the saving is actually in the form of actual saving and not avoidance as such. Yes, in future, specifically things like spectrum and all that, will have a future benefit in terms of need for more CapEx or need for more spectrum.
On the headcount, one of the things that, at least from an Axiata perspective, not necessarily Telenor, we ask ourselves, assuming there's zero, theoretically, zero headcount, is this still a good deal? The answer is yes. From our own calculation, again, might not necessarily Telenor, we look at the headcount is about 10, 15% of the synergies. Therefore, we are not banking 100% on that. Having said that, inevitably, there could be a productivity gain by combining the company. I won't comment beyond that. I think we should be able to handle that. On the You have answered number two? You cannot remember.
Antitrust, I have not.
On number two, antitrust, we are not aware of any policy or the threshold that exists to say beyond a certain number, you have to reduce or beyond certain spectrum, you have to reduce. As I said earlier, if you look at it from a pure mobile perspective or really pro forma, our market share will be mid to high 50s. Today's world has changed so much, it's our job to explain to MCMC that you should be looking at least from a converge perspective, which includes TM and Time, because the border has been blurred so much that you cannot separate those two. If that's the case, we are only to receive one third of the pie.
Last but not least, as I mentioned earlier, if you look from a consumer point of view, there are so many choices today way beyond all the local players. People have choices for voice and data. In that respect, we believe we have a very good case why this needs to be done. In fact, on a positive side, the fight that is merged, we can contribute more than we could ever be with regards to the country's digital agenda, especially broadband. On the digital business, very good question. They do have a sizable operation in digital finance in Pakistan and many other countries. They do have advertising company, but that one is globally. They do have
Classified
classified ads and a few others. Directionally, we are actually thinking of putting it part of the scope. Because there is so much work to be done on digital, especially federation of digital can be very fluid, we decided to hold it to the phase II. Before we sign, we will definitely have a firm decision on this.
All right. Thank you.
Thank you.
Thank you, Ranjan. We'll take the next question from Srini Rao from Deutsche Bank. Please go ahead.
Yeah. Hi. Thank you very much. Srini here. Just, I wanted to first clarify and again taking off from Prem's question on the merger mechanics. Is it fair to say the first or one part of the deal is Digi buying out Celcom through a share swap? That's the first or one leg of the transaction, then the second would be the rest of the current list co Axiata giving stake to Telenor in lieu of the assets. Am I correct in the transaction mechanism? Then, of course, subsequently, as is mentioned, choose to list the global TowerCo later. Would that be a fair, so to say, understanding of the transaction mechanism? That's my first question.
Okay. Yeah. Let me pass to Asri as our Group Chief Corporate
Okay. The second part where you're saying, Khazanah are giving stake to Telenor. I think based on the announcement, it is actually an injection of assets by Axiata as well as Telenor into a merge co, and in result, merge co will issue new shares resulting in the shareholding as per the announcement. That is the structure as far as the merge co is concerned. As a result of this injection of assets by these two entities into a merge co, there will be a merger, intended to be a merger between Celcom and Digi. Which as of now, the plan is for it to be based on a non-cash share issuance transaction but of course, subject to regulatory approval and exemption.
Okay. That's two parts.
The third is the TowerCo as what mentioned by Tan Sri that is the intention as part of the potential of the entities within the merge co that may be listed in the future include TowerCo.
If I am an Axiata minority shareholder today, I should expect to get some shares in the current Digi company obviously in lieu of the Celcom's assets going into Digi.
Yes.
Subsequently over a period of time.
If you are. Yeah. Go ahead.
Subsequently then. Secondly, with my Axiata minority shares today, I should expect them to get exchanged into the shares of the merge co when it gets listed on Bursa and some other exchange. Am I correct in this?
Okay. Like what I mentioned, this involve an injection of asset by Axiata and Telenor of their Asian operations into a merge co. As far as the minority shareholder of Axiata, today your position does not change. You still remain holding shares in Axiata. It is Axiata as an entity, Axiata Group Berhad, that will own the shares in the merge co as a result of consideration of Axiata entity injecting its assets into the merge co. Similarly, for Telenor, as a result of them injecting their Telenor Asian operation into the merge co, as a consideration, they will get a stake in the merge co as part of the consideration. Again, to reiterate, as a minority shareholder of Axiata Group Berhad today, your position does not change.
Except that I might get shares in the current Digi list co, right?
No. If any, it will be the merge co who will be the shareholder of the listed merge entity of Digi and Celcom.
As a Axiata shareholder, you continue to remain shareholder of Axiata.
Exactly.
It's Axiata which then owns a stake in the merge co.
Yeah. again, as what has been responded by Tan Sri and Vivek to the earlier question, as of now, Axiata remains as a listed company, being the shareholder of the merge co based on that swap ratio that has been announced.
I think bottom line, what we're trying to say is that the upside of the deal in Asia. In the future, post-completion, not now, any upside would have to be delivered via Axiata. Any investors who want the upside of the whole merge co, including the Malaysia co, the combined Digi and Celcom, and the investment into Indonesia that we plan to do, and so on and so forth, the best way is to buy shares via Axiata. That's Axiata's proposition post-completion.
Understood. This is really helpful, Tan Sri. Just two more questions I have. Is it fair to say that as the deal mechanics suggest now, there is unlikely to require any general offer in Malaysia at this stage? That's number one. If you can clarify that. Secondly, is there any thought process of equalizing the stakes over a period of time? I don't know. Thirdly, at least can you reaffirm the fact that the governance would be mostly equal and not reflect a difference in the shareholding?
Okay. Let me ask Asri to answer the third question.
The governance of the merge co would be equal board seats, or would you still reflect the relative differences in the shareholding?
Good question.
Okay. As what I mentioned, the intention is for the Malaysian merged entity between Celcom and Digi to remain as a listed entity, this would require a lot of discussion with the relevant regulatory authorities.
Okay. On the first question, there's no plan at this point in time at all. The fifth question, as I mentioned earlier, a very important point, the time point is the merger of equals, or the spirit and principle of that. Hence, we are, as we speak, working out with the governance model such that although the board members will obviously reflect the shareholdings. Therefore, they will have the majority. The way we run the company will reflect the spirit of the merger.
Any plans on equalizing the shareholding?
No, there's no plan at this point in time. I don't have enough money at this point.
Understood, Tan Sri. Thank you.
Thank you, Srini. We'll take the next question from Navin Killa from UBS. Your line is open. Please go ahead.
Hi. Thank you for the opportunity. I had a couple of questions. One is, given that essentially you'll be shifting stakes in a lot of listed companies across the region into this new entity, that includes dtac, XL, Digi, obviously. Is there a possibility that you might have to make a general offer for those individual entities, given that controlling stakes are changing hands? Then the second question is, again, I understand a lot of details have not been ironed out, but is there a preliminary view on how you look at the debt levels in the combined entity, either on an absolute basis or, I guess, debt to EBITDA or whatever way you look at it? Thank you.
What do you ask the second question?
Let me answer, Navin, the second question. I think as a combined entity, we look at debt headroom, which should be anything around MYR 15 billion-MYR 20 billion in terms of the additional headroom based on current debt to EBITDA requirements. However, we also feel, given the strength of the balance sheet, we should have a much better potential rating going forward.
The first question, Asri.
Like what we have highlighted, yes, we acknowledge that this would involve transfer of assets across, I think, nine countries. Yes, it will be part of the phase 2 discussion, where we will actually go into the details of the requirement, including discussion with the relevant regulatory authorities.
I guess the answer is that you're still not sure, and there is a possibility that you may have to make general offer for some of these companies like dtac and XL and so on. I guess a second question which is related to that also is whether there is a risk of a capital gains tax liability as you do these stake transfers in some of these cases.
Yeah. Basically, before we go into this stage, there have been a preliminary study that have been done. Like what I said, only today that we have announced, and the next step will be for us to actually sit down, look at the details, and have a discussion with the relevant regulatory authorities. It is acknowledged as per all the things that you have mentioned. Based on the current existing guidelines, yes, there is a possibility.
Okay. Thank you.
Thank you, Navin. We'll take the next question from Siwat Luddin from Goldman Sachs. Please go ahead.
Hi. Two questions from my side. First one, in your Axiata 3.0 plan, in terms of being a new generation digital champion, what will the merge co do versus Axiata itself in executing the digital efforts? What I'm trying to understand here is the operational splits between Axiata and the merge co later. The second question is, could you give us more color on what you mean by CapEx intensive growth in Indonesia and Thailand? Should we actually expect any changes in the company's directions this year? Thanks.
Okay. On the first question, this is one of the many things we have not decided what to do yet. It is conceivable that we will operate separately or we operate together, right? Again, I really cannot answer this question on what we want to do with the digital companies. Having said that, it is our intention to actually put it as part of the merge co and then combine the operations, our digital and their digital, and of course, at the same time leverage the opcos for the synergies. Beyond that, I really cannot answer your question at this point. On the second question, shall I say I cannot talk about Thailand per se, but I can talk about Indonesia.
One of the expressed desire from this deal, although not captured formally, is that we intend to invest more in both broadband and mobile than what we have been in the past. We believe that we have the unique opportunity to have a good position, strategic position in mobile, and also to capture the opportunity in broadband in Indonesia. Obviously, as we have mentioned to the investors, even without Telenor, we are looking at it already in a serious way and investing to some extent, but believe we can double down on this. That's the point.
Okay, got it. Just a clarification. You mentioned you expand more into mobile and broadband, is that correct?
That's right.
Okay, got it. Thank you.
Thank you.
Thank you, Siwat. We'll take the next question from Peter Milliken from Deutsche Bank. Please go ahead.
Hi. Actually, I had pretty much the same question of what you were planning to do with the increased firepower in Indonesia, and I think you've kind of hinted at that already. Should I assume that you talk about wanting to get into broadband more, but on the mobile side, I guess XL Axiata has been constrained. Do you see that that constraint is now ending after this merger?
Yes. Of course, responsibly, but yes. I think our constraint is not just funding, our constraint is how does it impact to our short-term profit. We are very conscious that as part of our 2019 strategy, that we want to deliver, 2019 and 2020, we want to deliver more profit. Trying to balance that has been very tricky for us, both in mobile and especially broadband. Now with this, I'm not saying that we will go full blast irresponsibly, but of course we have much more latitude to increase our investment with relatively a lower impact to our profit, and of course, with the funding that we have, with almost negligible impact to our funding capability.
If I may just add, I think to be fair, this is the initial objective, but we've not sat down with Telenor to develop the future combined business plan. I think that's when, the second phase, we will do that, and that's when we will have the real visibility of what we want in each of the markets.
Yes. To confirm that, the business plan, the strategy for the whole mergerco and a business plan, very specific business plan, and the financials will be only decided and agreed upon at the point of signing.
Sure. That all makes perfect sense. Thank you very much.
Thank you.
Thank you, Peter. We'll take the next question from Ranjan Sharma from Daiwa.
Hi. Good afternoon. I have two questions, please. Firstly, with regards to the combined entity, could you talk through with regards to how you intend to set the dividend policies going forward and in particular, if there are any balance sheet constraints from a retained earnings perspective? The second one is with regards to the tower business and the valuations. Given that this is an in-market consolidation, have you reflected a potential valuation shift when you have decided on the merger ratio? Thank you.
On number 1, obviously, we've not even discussed that. This has not been on the table at all, so I can't even answer that. On number 2, mathematically, we have done a lot of homework on these valuations to derive at the synergies, but again, at this point, we are not at liberty to disclose.
Okay.
Sorry about that, Ranjan. Any further questions?
No, that's all. Thank you.
Thank you.
That is all the time we have for question and answer for today's call. We will pass back the call to the speakers for any additional or closing remarks.
Well, thank you again to all for joining this conference call. I know it has been a last-minute thing where we invited you this morning, because of the reasons which we are aware of, we could not do it earlier. I am certainly very excited about this deal. This is a mega merger, apparently one of the largest or the largest mergers in the last one or two decades. This will be the real needle moving event for us, and also hopefully for Telenor. Thank you very much.
That concludes today's conference. Thank you, everyone, for your participation. You may now disconnect.