EXCL and FREN (FREN IJ, Not rated) have officially announced a definitive agreement for a proposed merger, resulting in a combined pre-synergy enterprise value of approximately IDR104tn (~USD6.5bn). In our previous report, we highlighted the potential implications from this anticipated tie-up. Post merger, EXCL will serve as the surviving entity and will operate under the name PT XL Smart Telecom Sejahtera Tbk (XLSmart).

Key details of the merger plan:

1. Surviving entity and dissolution: EXCL will become the surviving entity (to be renamed XLSmart), while FREN and SmartTel (unlisted) will be dissolved upon the merger’s completion, integrating into XLSmart.

2. Merger valuation and timeline: The merger valuation for EXCL is set at IDR2,350 per share, reflecting implied upside of ~4.9% (from the closing price of IDR2,240 as of 11 December 2024). The target effective date for the merger is 15 April 2025.

3. Pre-merger dividend: Before the merger, EXCL will distribute a dividend of IDR85 per share, representing an implied yield of ~3.7%.

4. Ownership and governance: Axiata (AXIATA MK, Buy) and Sinar Mas (unlisted) will jointly control XLSmart, each holding a 34.8% stake with equal influence over strategic decisions. Management will also reflect a 50-50 split, with the CEO coming from Axiata.

5. Cost savings and operational adjustments: The merger is expected by management to generate cost savings of approximately USD300-400mn annually within 3-5 years post-merger. Additionally, about 20-30% of the combined 67,000 sites will be decommissioned due to overlap.

6. Dissenting shareholder exits: Dissenting shareholders will have exit options, capped at no more than 10% at IDR2,350 for EXCL shares and IDR25 for FREN shares.

7. Financial arrangements for Axiata: Upon completion, shareholding equalization will result in Axiata receiving up to USD475mn. This includes USD400mn at closing and an additional USD75mn at the end of the first year, subject to specific conditions.

While we believe the merged entity would be in a better position, it would not materially alter the competitive landscape (i.e., intense both in Java and outside Java). Still, on a relative basis, Telkomsel (TSEL, unlisted) would be most at risk from the planned merger, in our view, particularly as we believe competitive dynamics in Java will remain intense; outside Java TSEL is facing continued pressure given its already premium pricing position (which would potentially erode its market share).

In our view, although the merger might be good for the industry, we believe the merger price for EXCL and the pre-merger dividend are not particularly attractive for minority shareholders. In the near term, considering the typical integration challenges and the intense competitive dynamics in the Indonesian telecommunications sector, ISAT (ISAT IJ, Buy) remains our preferred stock in the Indonesian telco/tower space.

Longer term, we think there will be some merger synergies that XLSmart will enjoy. The company has estimated that upon integration completion, annual synergy benefits would be USD300-400mn. Still, there would be some quick win synergies that XL Smart could realize. In the table below, we have provided some pro-forma analysis assuming with some quick synergies, which could come from 1) revenue uplift for ex-FREN subscriber base reflecting better network infrastructure from merger, 2) personnel efficiencies, 3) marketing synergies, and/or 4) network infrastructure (part of operations & maintenance). As depicted in the assessments below, using 9M24 numbers for reference, we estimate some earnings uplift of ~USD150mn; bringing implied ROAE to ~7-8% (from ~7.0% on pre-merger). Longer term, we think the synergies should improve accordingly towards annual pre-tax profit uplift of USD300-400mn).

Valuation and risks

EXCL - We maintain our Buy rating and we derive our TP of IDR2,600 based on a DCF analysis, using a risk-free rate of 6.2%, an equity risk premium of 7.4%, and a terminal growth rate of 2.5%. This results in a WACC of 9.4%. At our TP, the stock would trade at 2024F EV/EBITDA of 4.7x (compared to 4.1x at the current price). Downside risks include adverse macro conditions, lower customer spending, less service price hikes leading to lower data prices, irrational competition behavior, and/or higher opex.

Fig. 1: Shareholding structure

Fig. 2: XL, Smartfren, XL Smart result

Fig. 3: Telco spectrum holdings (Mhz)

INVESTMENT RATINGS
A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general. 

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Nicholas Santoso (nicholas.santoso@verdhana.id)

Erwin Wijaya (erwin.wijaya@verdhana.id)