Astro and Maxis to merge? Makes sense say analysts

It has been reported that Ananda Krishnan (AK), who owns a 62.4% stake in Maxis and a 40% stake in Astro Malaysia Holdings Bhd and controls the companies through his privately-owned Usaha Tegas Sdn Bhd, is considering a corporate exercise between the two listed entities.

A merger will lead to an entity with a market capitalisation of RM53 billion (versus Maxis’ RM44 billion) with a combined net profit of RM2.6 billion.
Given Astro’s lower valuations, the merged entity’s FY18F EV/Ebitda could slightly drop to 10.3 times with FY19F price-earnings sliding to 20.8 times.
However, Astro’s higher FY18F net debt/Ebitda of 1.7 times will cause the merged entity’s to rise slightly from 1.3 times to 1.4 times.
Over-the-top (OTT) players like inflix, Netflix and dimsum, and other pay-TV options such as unifi’s HyppTV have driven down Astro’s Arpu and eroded its subscription base, and advertising revenues.
“The global trend is for a consolidation between the companies that provides connection to consumers and content providers. It is happening everywhere and Usaha Tegas is in the best position to capitalise on it,” said the report.
The reclusive tycoon has been looking at how to position the group’s telecommunications and media business in line with increasing competition.
Apart from facing competition from multiple fronts, Astro also has to contend with illegal satellite dishes being installed to tap into the services of other pay-TV operators located in other countries.
One market analyst says he would not be surprised if AK uses Maxis to takeover Astro.
“It is similar in the United States where traditional telecommunication companies are buying entertainment companies. Corporate exercises between telco and entertainment companies have received the nod from the US legal system,” he added. “The US court gave the green-light for telecommunications giant AT&T to take over Time Warner – a deal that is valued at US$80bil (RM240bil).”
AmInvestment Bank Bhd analyst Alex Goh said the merger would be a rational option as both companies face intense competition on multiple fronts.
He added that the merger could lead to an entity with a market capitalisation of RM53 billion and a combined net profit of RM2.6 billion.
UOB KayHian Securities (M) Sdn Bhd analyst Chong Lee Len believed the value inherent in the potential tie-up centers on the synergy that can arise given that both Maxis and Astro can benefit from content cost optimisation as a single entity.
“The merged entities will also pave the way for cost optimisation in marketing, staff and overhead costs. Maxis spends 2% of revenue on marketing expenses on a yearly basis and an additional 7% on staff cost,” he said.
“Given Astro’s lower valuations, the merged entity’s enterprise value to its earnings before interest, tax, depreciation and amortisation (EBITDA) for the financial year ended Jan 31, 2018 (FY18) could slightly drop to 10.3 times with FY19 price earnings sliding to 20.8 times.”
Merger synergies from the convergence of Maxis and Astro’s services such as Maxis mobile and Home Fibre plans could be repackaged with Astro internet protocol television (IPTV) offerings, which could also be streamed to mobile devices.
There was already talk of Astro being privatised but the company denied it had been informed of such developments by its major shareholder AK.
After May 9, the new government has stated its intention to end monopolies – something that is not expected to affect Astro much because its 10-year protection of being the only satellite pay-TV is at its tail-end.

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