Axiata and Sinar Mas sign agreement exploring merger of Indonesian telco units

The proposed merger between Indonesian telcos XL Axiata and Smartfren moved one step closer to reality on Wednesday with the signing of a non-binding agreement to explore the potential transaction, which would create an entity valued at $3.5 billion.

Company owners Axiata Group and Sinar Mas confirmed in a stock exchange filing that they are at an "early stage of evaluation," but cautioned that "there is no certainty" that ongoing discussions will lead to a final agreement.

During this exploratory phase, Axiata said the companies will work on due diligence, preparation of a joint business plan and agreement on key terms. Both companies will also work on validating the merger rationale and its value creation for shareholders.

Meanwhile, both companies intend to be joint controlling shareholders of the new entity, referred to in the memorandum of understanding as "MergeCo."

"Axiata believes that MergeCo will have the strategic agility, competence and scale to meet increasing expectations and demand from consumers, businesses and the Indonesian public sector," the company said in a press statement.

"MergeCo is expected to deliver superior customer experience in the telecommunications sector and create additional shareholder value including through synergies from the combined operations of XL Axiata and Smartfren," Axiata added.

Creating a strong third telco operator

If the merger deal pushes through, the new entity, with a combined customer base of 100 million, would be able to offer a strong third alternative to the other two major telco operators in Indonesia – Telkom Indonesia's Telkomsel and Indosat Ooredoo Hutchison.

Citing Indonesia's Minister of Communication and Informatics, Budi Arie Setiadi, Reuters reported last week that Axiata and Sinar Mas have asked for approval from the country's telecoms regulator to proceed with a merger plan.

"It's better to have only three operators in Indonesia, more manageable. After that we can improve the quality of the services," Budi told Reuters.

Rumors of a merger between XL Axiata and Smartfren resurfaced three weeks ago. Reports said that the two companies were discussing the structure of a potential deal, which could involve a mix of cash and shares.

Indonesia's two smallest telco operators have been eyeing each other for a potential merger since 2021 – at a time cellular operators in Indonesia were joining forces to consolidate resources in a crowded market. But talks went nowhere.

In September, reports emerged that the two companies were again revisiting the planned merger. Other options under consideration allegedly include network-sharing agreements and partnerships.