Norway's Telenor is in talks with Malaysia's Axiata about a merger of Asian assets that would create one of south Asia's biggest telcos, serving around 300 million customers and generating US$13 billion in annual sales.
The deal, announced earlier today, would leave Telenor with a controlling 56.5% stake in the new-look business and Axiata with all remaining shares.
The two operators have revealed their new business would have its headquarters in Kuala Lumpur, Malaysia's capital, and consolidate operations in Malaysia, Myanmar, Pakistan and Thailand, where both Telenor and Axiata are currently rivals in the telecom sector.
Axiata's operations in Cambodia, India, Indonesia, Nepal and Sri Lanka would also form part of the new entity, although Axiata's Bangladeshi business will be left out of the arrangements and continue to be managed separately by Axiata.
The attempt at what would be one of the biggest mergers in the last few years points to the challenges the separate companies have faced in some of Asia's low-cost and highly competitive telecom markets.
While their operational performance has been strong in most countries, both telcos have been trying to slash costs to boost profitability and free up cash for investment in more advanced network and IT systems.
Telenor said it was eyeing "synergies" of around $5 billion from the merger, which would have approximately 60,000 mobile towers across Asian market if completed. "I am confident this will create significant value for our shareholders and will be beneficial to our customers," said Sigve Brekke, Telenor's CEO, in a statement about the deal.
Emphasising the need for what it called a "mega merger of equals," Axiata referred to the blurring of lines between fixed and mobile technologies and said competition was intensifying partly because of the challenge from Internet-based services and content providers.
The merger with Telenor would help it to cope in markets where prices are falling and there is a need to keep investing in network improvements because of the "ever-increasing customer demand for data," it said.
Telenor reckons the new business will generate annual sales of roughly $13 billion and earnings before interest, tax, depreciation and amortization (EBITDA) of about $5.5 billion.
Its investors have reacted positively to news of the plans, sending Telenor's share price up 4.5% in Oslo today at the time of publication.
But the companies could face major regulatory obstacles as they look to secure backing from competition watchdogs for their deal.
As they work on finalizing agreements relating to the proposed transaction by the third quarter of 2019, Telenor and Axiata may have to address concern that such a mega merger would represent a setback for Asian customers who rely on access to low-cost telecom services.
Asian authorities will also be worried that talk of $5 billion in synergies means any deal will trigger major job losses and drive up unemployment statistics.
Telenor's headcount has already fallen sharply in the past few years, dropping from 38,000 in 2015 to 31,000 by the end of 2017, partly because of the divestment of an Indian business. The Norwegian operator stopped providing details of employee numbers in its 2018 annual report and had not responded to a request for details at the time of publication.
However, it has eagerly drawn attention to plans for "accelerating technology transformation and digitization in Malaysia and across Asia," and said it would immediately set up a Malaysian Research and Innovation Center focused on 5G, the Internet of Things and artificial intelligence if the deal goes ahead.
Morgan Stanley is advising Axiata on the deal, while Citi is acting as a financial advisor to Telenor.
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— Iain Morris, International Editor, Light Reading