Good afternoon, everyone, and thank you for joining this briefing on the XL Axiata Smartfren merger, creating a digital champion in Indonesia that was announced this morning. Presenting for Axiata from Jakarta will be Vivek, Nik, and Dr. Hans. I hope that the lines are all going to be very clear for you. I will now pass over to Jakarta to take us through the slide deck.
Very good afternoon to all of you. Welcome to this very historic, important moment for Axiata as well as XL Axiata. As you recall, in May, we had signed the MOU with the Sinar Mas Group to proceed further with the XL Axiata Smartfren merger. I'm pleased to inform that yesterday we did sign the definitive agreements, and today is the day we made the announcement in the morning, and the necessary filings to the regulator would be carried out. So let me quickly go through the few slides, and then we will open up for Q&A. So if I can go to the next slide.
So this creates one of the leading telcos with the regional telco experience which XL Axiata brings, having run operations in various markets, as well as the local expertise, as well as knowledge, and also presence in the local ecosystem to combine the two assets to create what we now call XLSMART on completion Telecom Sejahtera, in short, XLSMART . Next slide. So the current shareholding is, as you know, Axiata owns 66.5% of XL Axiata, and 33.5% is held by minority shareholders. Sinar Mas, through its four entities, collectively owns 77.5% of Smartfren, and 22.5% is held by the minority shareholder. And Smartfren owns pretty much 100% of another subsidiary of there, which is Smart Telecom, which has got some additional licenses. Post-merger, we will be equal owners of XLSmart at 34.8%, and the minorities would be 30.4%.
As part of the merger, XL Axiata will be the surviving entity, and Smartfren and Smart Telecom will be dissolved. Now, how does that whole thing work? First step, while both things happen simultaneously, first step is really around the relative value of the two companies, and that results in the issue of new shares to Smartfren by XL Axiata at a merger ratio of 72 to 28. And that eventually results into the ownership of Sinar Mas Group at 21.7% and Axiata at 47.9%. Now, obviously, this is not exactly 72 to 28 because of the fact that Sinar Mas owns 77.5% of Smartfren, and we own 66% of XL Axiata. So that's the first step.
Second step is basically a secondary transaction to equalize where Sinar Mas acquires 13.1% stake in XLSMART from Axiata at a cash consideration of $400 million, which would be paid at the point of completion, and $75 million, which would be paid after the first anniversary of the proposed merger, subject to certain conditions which we think are not onerous in nature, but we can get into those details later on. Eventually resulting in the joint ownership of 34.8% or joint controlling ownership with equal influence from both over XLSMART's strategic direction. So that's in summary how the transaction will happen. As I said, both of them will happen at the same time. Next slide. So just getting back to the strategy which we had actually laid out last year in December to our analysts and investors on what we want to do.
Part of that strategy, if you recall, these were the five vectors of value creation. One of them was the structural and strategic transformation of Indonesia. So this is the last part of what we were trying to do in terms of the overall strategic and structural transformation in Indonesia. So that's a critical part of our value creation model to allow us to be a sustainable dividend company as we go along. Next. So what does this structural transformation entail? I think there were a few things which were more organic in nature because of the sheer pricing power in this market. I think ARPU increase was one of the very important elements. We've seen the market over the last few quarters having an ARPU increase barring the last quarter where we saw some bit of stagnation as well as a minor dip in the ARPU.
But we are a firm believer this market is here to be more rationalized, and pricing power will come back to the operators, and this will be further exasperated by the further consolidation which we are talking about in the market. Second thing we did was direct distribution. I mean, I think one of the issues in the market was really dealers dominating the pricing of the end product. So XL Axiata did a fabulous job of going direct to the retail. This not only helped in terms of reducing the cost of distribution, but also helped in controlling the pricing at the distribution. In addition to that, I think XL Axiata has done very well in terms of moving more to the digital channels with around 35% of their revenue now comes from the digital channel where pricing is quite in control.
As you know, in the traditional channels, typically retailers mark up on the end consumer price. So this allows us to control the pricing. In addition to that, I think there have been a lot of efforts made in terms of capital productivity, CapEx to EBITDA ratio, which is one of the key focus areas for us, which has been lowered. I mean, if you look at CapEx intensity, it's been around 22% last year. This year, we will end up with even lower CapEx intensity. So that's all resulting into the better cash flows and better profitability for XL Axiata. But that was part of the organic initiatives which we had put in place. Second one was really helping XL to move to a converged telco with mobile and fixed broadband. So we finished, as you know, end of September, the carve-out of customers to XL .
So XL becomes an asset-light ServeCo, whereas Link Net, which was the subsidiary of ours, became pretty much a FiberCo and not only looking at serving XL, but also looking at serving other ISPs in the market as a pure wholesale fiber provider. And this would mean potentially next stage of fundraise for Link Net for it to accelerate its build-to-suit deployment for XL. And third part of this whole initiative on structural transformation was the merger of XL and Smartfren. If I go to the next slide. So what are the rationales around this merger? One is very clear scale and is commercially stronger with around 94.5 million subscribers, IDR 45.4 trillion of revenue, and IDR 22.4 trillion of EBITDA. And potentially after consolidation, we would be quite close to the number two telco in the market in terms of subscriber base.
I think this does provide us to have a stronger mobile operator position, and we will be able to initiate actions on transformation of the mobile sector by making the mobile sector far more rational and expect the pricing powers to come back to the operators. Next slide. Second, clearly, one of the big benefits of this merger is similar spectrum basket with the other two telcos in the market. Yes, the spectrum profiles may be a bit different, but in terms of total quantum of spectrum, quite close to the other two. This would allow us to provide better experience to the customers and also help us in terms of reducing the CapEx requirement as we go along and build a business for the future. And this, I think, is an important part as we move ourselves to be far more customer-centric and providing better network experience.
Next slide, so second rationale is clearly, or third rationale clearly, the synergies. I think the two big buckets of synergies, I would say one is the network and IT. Network footprint optimization, we expect around 20%-30% of the sites which are overlap sites will be decommissioned. It's not that the entire decommissioned sites would be immediate benefit. Some of them would be redeployed in markets where the network experience or cities where the network experience is relatively average to improve the network experience, and we've seen wherever we've been able to improve the network experience, the gap in pricing between the leader and XL reduces, so that should help us. Second part, which is what I talked about, is reinvesting some of those into new target cities which will focus on profitability. Vendor negotiation, I think we have four vendors combined.
The immediate action would be to start renegotiating some of the vendors. We may not need four vendors in a combined entity, which does provide some level of competition in the vendor landscape. And that should help us the benefit of leverage, the volumes as well as price book benefit we should get as part of that negotiation we will carry out. Third and the fourth item is largely around the channel optimization. We have not factored in significant impact of channel optimization because going forward, immediately we do not intend consolidate. For a period of time, the management will come out with a proposal depending on segmentation and priorities, how to look at the three brands. But that's not. XL Axiata has been leading on the digitization journey, and given the Smartfren customers would also be able to go along with that digitization.
All this put together, we are expecting around $300 million-$400 million post-implementation of integration savings on a pre-tax basis. And these are annual run rate savings which we are looking at. But as I said, the largest part of that will come out of the network and procurement activities. If I go to the next slide. So I think one of the unique features of this merger is really the strength of two large groups. XL Axiata brings in its knowledge, experience of leading telecommunication and digital businesses across the nine markets we have with significant operational experience. In combination of that with local expertise of Sinar Mas Group, which has seven different lines of businesses, and knowledge, understanding of the local market as well as the potential of local synergies which can be driven through the large ecosystem, mass ecosystem play they have.
So I think, for example, very clearly there are advantages of having both Link Net and Moratel as part of the same portfolio that should drive greater consolidation. The business of Axiata, which has been quite benefited out of its authentication and analytic services, could be further expanded for the Smartfren customers. Sinar Mas has got data centers. We could leverage data centers to provide enterprise services and become a preferred Indonesian enterprise service provider. Group where they have more than 90 million customers could also be leveraged through cross-sell of telco and financial offerings. So large ecosystem advantage and also the knowledge and expertise which Sinar Mas comes with in running businesses in Indonesia would be a big advantage.
Hi, can the participants hear us or see the screen?
Hi, Nik. We can hear you again. There was about a 10-second drop just before this. It's just come back again.
Mr.
Jonathan, I think we can't get the slides moving. Can you move to the next slide?
Yep. Yeah.
Okay. Good. Okay. The other thing which we see in Indonesia specifically, I mean, if you look at the ARPU as a percent of GDP, while it's seen some improvement over the last two years, is relatively lower than the other peers in the space. And a lot of them, if you look at, is actually fairly consolidated markets. So we do expect Indonesia with further consolidation to see better ARPU as a percent of GDP. And that essentially comes from the realization that its markets, when consolidated, drive more for more. So you're able to get some pricing power by offering better data because you have a position to reinvest some of the cash flow benefits which come. So we expect the ARPU enhancement.
And it's also been seen in Indonesia itself at that point in time in 2013, 2014, when XL Axiata merger happened. And also we've seen after the merger of Indosat and Hutchison here that the ARPUs have seen a growth improvement. But there's always inertia after a period of time we've seen across markets. And then after that bit of plateauing, we will start seeing that further coming back here. So intention of ours is really not to drive just pure market share, but to see the industry structure is far more resilient. And industry's ability to improve the pricing power is what we want as part of this merger. Okay. Next slide. So the other piece I think where we have opportunity is in other areas of growth. As you know, I think we've been pushing for the fixed broadband in Indonesia with XL being quite active.
We still see a big opportunity there. Given the power of having Link Net and Moratel in the portfolio, we should be able to build strong home passes for the merged company to deliver home connects to the customers, and also, I think the opportunities in the area of ICT, I think large-scale digitization, which is potential focus on MSME, IoT adoption, looking at software as a service, workloads shift to public cloud, growing demand for DC capacities given the risk DC capacities available with Sinar Mas Group, which we could leverage on, and shift to localization, data sovereignty, so there are areas in enterprise ICT which I think we can play a strong role given there is a large opportunity or the revenue size is fairly big, and given that fact that Sinar Mas ecosystem does provide us entry into some of these areas, I think we're going to be leveraging that.
Next slide. Okay. So with this, I'll hand over to Nik to give a little bit around the effects of proposed merger.
Okay. Thank you, Vivek. If we can go to the next slide. So this transaction, even before the future upside on synergies which could be realized, is already a value accretive to the tune of approximately $200 million or MYR 800 million. If you were to look at the left, which is the current standalone valuation of XL Axiata today based on a 90-day average market capitalization of $1.8 billion, Axiata's stake is worth $1.2 billion. The resulting merger that will basically result in XLSMART pre-equalization, so the first step of the transaction if you like, brings up the valuation of the MergeCo to $2.7 billion.
Post the equalization of the shareholding, which will result basically entails the equalization payment of $475 million or approximately MYR 2.1 billion from Sinar Mas to Axiata. You will see that the resultant equity value of $0.9 billion, when you add on the $475 billion, when you add on the $475 billion, will come up to a total valuation to Axiata of $1.4 billion. So compare this to the $1.2 billion pre-merger. This will result in the $0.2 billion or $200 million US dollar value accretion from the transaction. If we can go to the next slide, please. On a pro forma basis and for illustrative purposes, using the unaudited Axiata results for the nine months to 30th September 2024, PATAMI increases by approximately MYR 45 million.
Here, the gain on disposal and also the share of MergeCo results on a pro forma basis basically offsets the deconsolidation of a year-to-date PATAMI from XL . On the right-hand side, you can see that gearing improves from 1.21 to 0.77 times. This is mainly to the deconsolidation of XL 's borrowings and leases, which amounts to approximately MYR 12.5 billion as at end of September 2024, and on the net debt to EBITDA basis, it also improves from 2.59 to 2.48. Whilst there is a deconsolidation of borrowings and leases of 12.5 billion, the ratio-wise, it outpaces the deconsolidation of annualised EBITDA from XL Axiata of approximately MYR 5 billion. So next slide, please. So on the governance, I've got two slides on governance, and this is building on what was alluded to, Vivek, earlier with regards to joint control by Axiata and Sinar Mas of the MergeCo.
The two key committees are the Board of Commissioners and Board of Directors. So for Board of Commissioners, both Axiata and Sinar Mas have nomination rights of three non-independents and one independent commissioner each. And both parties, Axiata and Sinar Mas, will also jointly appoint one independent commissioner. So the total of nine will be three non-independents from Axiata, three non-independents from Sinar Mas, and three independent commissioners. On the Board of Directors, the number count is 10, where both Axiata and Sinar Mas will have nomination rights for four directors on the BODs each, with two directors being jointly appointed or nominated by both Axiata and Sinar Mas. What you will see on the slide here is for Axiata, the four directors' nomination rights include the CEO, whereas for Sinar Mas, the four directors will include the CFO.
Next slide, which is also my last slide, is on in addition to the Board of Commissioners and Board of Directors, there's also going to be seven further additional BOC subcommittees, of which the first two, the Board Audit Committee BAC and the BNRC Board Nomination and Remuneration Committees, are the statutory committees. And on top of that, we have five further committees that will essentially enable the smooth decision-making and operations of the MergeCo. This will be the Board Risk and Compliance Committee, BRCC, Merger Integration Committee, Board Investment Committee, Technology Advisory Committee, and Procurement Committee. With that, I'll pass it back to Vivek to take us through the summary and timeline.
Basically, benefits of the merger, one is clearly the MYR 2.1 billion proceeds as part of the equalization between us and Sinar Mas.
Second is, I think, joint control of a larger mobile operations with the share of upside from synergies, I think, which we talked about around $300 million-$400 million run rate synergies on a pre-tax basis after we finish the integration. Market consolidation should enable better ability to compete and also improve the overall market structure. Three players is better than four players in a market which is such large as the Indonesian market is. I think increased scale will help us drive network experience improvement, new technologies like 5G, home enterprise, etc., which should allow, in addition to the growth on the mobile side, would also allow us to add on growth in the future areas. And the last one, but not least, is really the strong local partner in Indonesia.
I think that should help get the benefits, as I said earlier, of a strong global knowledge and a very strong local presence. So I think those are, in summary, I think the benefits of coming out of this merger as well as, I would say, rationale of this merger. Let me go to the last slide to give you some timeline. So we've today made the announcement. The submissions have been made to the OJK and MoCD today. We've also made the announcement in Malaysia to Bursa. We expect around three months for the OJK approval, and I hope expecting MoCD approval to follow before that. And once that is done, we would expect the Bursa approval as well as conduct of the three EGM. First one would be Axiata, and then there would be one done separately for XL Axiata and Smartfren for the shareholders' approval.
And once that happens, then the last step we expect by most likely, if you look at these timelines, we are trying to see early quarter two, we should be able to complete the merger. But the target is to ensure by end of first half of 2025, the merger is completed and we have day one of the merged company. Okay. Next. So thank you. So I think then, Jonathan, you open up for Q&A?
Yes. Let's take some questions. If anyone has any questions, please raise your hand. Thank you, Vivek and Vivek for running through that. Give people a minute to post their questions up. All right. We have Sharon from Bloomberg. Sharon, could you ask your question? You'll have to switch your mic. Thank you.
Yes. Hi. Can you hear me?
Yes, we can.
Okay. Great. Thank you for hosting this call.
I'm looking at Axiata from a credit perspective, and I'm wondering whether you've had conversations with your rating agencies because I think one thing they were watching is whether this transaction would increase Axiata's exposure to frontier market risks. And so I want to know what's the potential rating impact there.
Hi. Yes, we have spoken to our rating agencies. So far, they haven't come up with any official basically potential adjustments as yet. So I think they too are waiting for further details which have been provided from the public disclosures today. So we will be engaging them very closely going forward, but we are hopeful of the fact that there wouldn't be any immediate rating adjustments downwards.
Okay. Sure. Thank you. And I'm not sure whether I missed this, but has the MergeCo announced any dividend policy going forward?
No, I think that's something which we will work between now and completion on what should be the dividend policy of the MergeCo.
Okay. Thank you.
I think there's a question now from Piyush. Piyush?
Piyush, you're on mute.
You're on mute. You're on mute, Piyush.
Hi. Can you hear me?
Yes, we can now.
Yeah. Hi. Hi. Thanks for the call. Vivek, just one follow-up question which I couldn't cover during XL call. XL has also proposed a dividend of IDR 1.1 trillion, around $70 million. So is this also considered when you're announcing the combined EV, like IDR 104 trillion, or this is kind of a separate thing because eventually XL has to pay from its operating cash flows and it will increase their debt, right?
Yeah. So Piyush, in Indonesia, as you know, there is this mechanism of lockbox.
So the price has been frozen for XL Axiata as of 30th September, which is the IDR 2,350, if I recall. And that is used for the purpose of arriving at the enterprise value of both the companies because there's nothing but those prices. You arrive at what is the consolidated enterprise value. Anything which is paid subsequently does not change the value price of 2,350, right? So effectively, that's an upside for the shareholders over and above the current price which has been used for the enterprise value.
Got it. So from Axiata perspective, that is an additional cash intake.
Yeah. Basically, 25% ownership of that $70 million was additional cash we will get. I mean, subject to this. So this is up to $70 million depending on what would be the final decision by the Board of Commissioners.
Got it.
But this is not included in the pro forma numbers which were just disclosed in your presentation, right?
The pro forma numbers would be yeah, yeah. These are not included in the pro forma numbers.
Got it. Got it. Thanks a lot. Thank you.
Are there any more questions at this time? Okay. Foong, you have a question? Please go ahead.
Thanks for the call. Just a quick question for Vivek, I guess, regarding the MYR 2.1 billion of proceeds, right? What are your plans to utilize that cash?
As we said in the, I think, Bursa announcement, also primarily to pay down group debt, this 475 would be used in addition if required for working capital requirement or some business need, but primarily for paying down debt.
Some of it is going to be paid down because there's a refinancing coming for some debt in the year 2025, which will be used, a balance will be used for paying down some of the bonds, I guess, but mainly for paying down debt.
And nothing for special dividends?
Primarily for debt paying down.
Okay. Got it. Okay. Thank you. Thank you, Vivek.
Hi, Prem. You have a question? Please go ahead. You're on mute, Prem. Prem, you're on mute. Now.
Yes. Thank you very much for the opportunity. Just a simple question from me, I suppose. There is this thing about dissenting shareholders and them being able to put shares back to both the Axiata as well as Sinar Mas Group. Could you talk around that structure and what are the contingencies with regards to funding that?
So if you look at the announcement, we said, and by regulation, up to 10% of the number of shares can be taken by the company itself. So that effectively, based on, I think, the share capital, that's around $200 million, which is what the company can take. And that's the first step where a company will buy all those shares. Beyond that is where both the shareholders equally stand by to buy. However, having said that, I think based on the experience which happened in the case of IOH as well as the experience of people attending, because this is dissenting shareholders is basically those who have to come and physically attend the EGM and dissent, and not only just dissent, but they should then subsequently offer their shares for sale. So that, based on the experience and the number which happened in IOH, which was very insignificant.
I think by regulation, we need to have someone stepping in. Now, as far as the so that's the 10%, and after that would be the two shareholders. Having said that, two shareholders could also identify somebody else who could step in as the one taking over those shares.
All right. Perfect. Thank you very much.
Thank you.
Do we have any last questions on the floor? We're on a bit of a timeline for people. Okay. I think there's no other urgent questions coming through. If there are, please just email them through to me, and we'll take them as they come. Gentlemen, ladies, thank you very much for hosting the call from Jakarta, and everyone else, thank you very much for joining the call.
Thank you. Thank you, everyone. Thank you. Thank you. Take care. Bye.