Research house on why Axiata should 'hang up’ on Idea Cellular

PETALING JAYA: PublicInvest Research opines that it makes more economic sense for Axiata Group Bhd to divest its stake in Indian telco Idea Cellular despite the proposed merger between Idea and Vodafone India would create the largest telco operator in India, with an estimated market share of 35%.
The research house explained that this is because of Axiata’s relatively small investment stake of 19.8% in Idea.
Axiata’s shareholding in Idea will be reduced to below 10% following the merger that will see Vodafone and Aditya Birla Group holding 45.1% and 26% of the combined entity, according to PublicInvest Research.
It also highlighted that over a four-year period, Vodafone and Aditya Birla’s shareholding in the enlarged entity must be equal. In case the equalisation of shareholding is not achieved, Vodafone will sell down shares to equalise its holding to that of Aditya Birla over the following five-year period.
This, PublicInvest Research believes, could suggest potential divestment of Axiata’s stake in the merged entity to Aditya Birla over the first four-year period.
However, the research house said it remains uncertain on whether regulators would approve the proposed merger given the importance of competition in providing affordable services to price-sensitive Indian consumers.
At this juncture, it is maintaining a “neutral” rating on Axiata with but noted that the slew of corporate news flows would provide support to its share price. The counter was down by one sen to close at RM5.07 yesterday.
PublicInvest also does not expect significant earnings enhancement in the first two years of operations for the merged unit as it takes time for the impact of cost-sharing and market share gain to kick-in for a sizeable market like India. Idea accounted for only 4.6% of Axiata’s normalised profit in FY16.
The merger, which is expected to be completed in 2018, would be synergistic given that Vodafone India’s strong presence in metro circles and Idea’s leadership in semi-urban and rural telco markets.