15 Jan Why a merger between Astro and Maxis is being talked about

This article first appeared in The Edge Malaysia Weekly, on December 17, 2018 – December 23, 2018.
By Kamarul Azhar, The Edge Malaysia on December 25, 2018 17:00 +08

THERE is much talk that Astro Malaysia Holdings Bhd will merge with Maxis Bhd as changes in the operating environment for the satellite pay-TV operator may force major shareholder tycoon T Ananda Krishnan to consider all possibilities.

In a Dec 6 report, CIMB Research upgraded its call on Astro to “add” due to a drop in its share price. It sees “attractive risk-reward potential for investors to ride the privatisation or M&A angle” for the pay-TV operator.

The question is, does a merger between Astro and Maxis make good business sense, and what would it create? Will a highly dominant multimedia and communications company be formed, and what does that mean for the public?

A lawyer who is an authority in competition law in Malaysia says such a merger is “interesting”.

“Why do I find it interesting? Because from the business point of view, the merger makes sense as the broadcasting industry moves deeper into digitalisation, and with the changed preference of the younger generation to consume broadcast content on-demand and on-the-go,” she says when contacted by The Edge.

“Astro is dominant in its field while Maxis has a strong market share in the mobile telecommunications segment. It is interesting to see how the regulators will react if there is a merger between the two companies.”

Astro is a major player in the broadcasting industry. As at end-October, the group had 5.66 million customers for its TV operations, which represent 76% of Malaysian households. It had a 75% TV viewership share, even after accounting for the shares of free-to-air broadcasters.

Meanwhile, Maxis is the largest mobile telecommunications company in the country. As at Sept 30, it had a 38.9% market share, compared with 31.3% for Axiata Group Bhd’s Celcom and 29.8% for DiGi.Com Bhd.

Observers say a merger between Astro and Maxis will result in a company that is strong in telecommunications and broadcasting. As more people consume content through their data network, the merger will allow Astro to become a full-fledged data-based broadcaster.

As for Maxis, with Astro within its fold, the group will be able to attract more consumers to migrate to its network, via the bundling of its MaxisONE product with Astro’s pay-TV and on-the-go service Astro Go, say observers.

“It will be akin to the acquisition of Time Warner by AT&T in the US. AT&T, with Time Warner within its fold, is expected to get stronger and be able to compete against the likes of Amazon and Netflix,” says one of the observers.

Talk of Ananda mulling a disposal of his stake in Astro has been going on for a few years. The end of Astro’s monopoly in February last year and the proliferation of internet-based video-on-demand services have pushed Ananda to rethink his investment in the satellite pay-TV operator.

It was rumoured that he wanted to divest his 41% stake in Astro as the group is finding it hard to grow its subscriptions, not to mention dwindling adex revenue and high content costs. However, the divestment plan did not materialise.

A source who has knowledge of the exercise says the merger will be announced next year and that work towards realising the merger at the shareholder level has started. “Usaha Tegas (Ananda’s private investment vehicle) has started looking at both companies and how a merger will create value for the shareholders. The merger will happen next year.”

If creating value for shareholders is the main reason for the purported merger, then Astro has to be restructured to create value for the shareholders of the merged entity, observers say about the anticipated merger.

For the nine months ended Oct 31, Astro’s pay-TV average revenue per user declined 0.8% year on year to RM99.90 from RM100.70. This is despite its TV household penetration increasing to 76% during the period from 73% in the previous corresponding period.

This shows that while the majority of households in the country are still customers of Astro, the revenue it gets from each household is declining, probably due to the free-for-life NJOI basic service.

The group’s revenue during the period declined 0.8% y-o-y to RM4.11 billion, with adex declining further by 7% to RM491 million. Net profit dropped 29% y-o-y to RM404 million and its earnings per share plunged 42% to 6.6 sen.

To be sure, Astro has started restructuring itself. It has embarked on cost-cutting measures, such as renegotiating for better terms with third-party content providers, says Chua Yi Jing, an analyst with Public Investment Bank.

“Astro is having a strategic review of its business structure, which includes deeper cost rationalisation and workforce optimisation. While this would book in potential one-off expenses in the coming months, we are positive on the long-term cost savings, productivity improvement and more effective redeployment of its resources,” he says in a Dec 6 report on Astro’s financial results for the third quarter ended Oct 31.

“In tandem with its strategy, the group has announced the cessation of operations of over-the-top video service Tribe and live streaming platform Tamago in view of the challenging landscape. We understand that any cost savings from the closure will be reallocated to its growing home shopping business.”

Some research houses have already assigned a “buy” call on Astro. Chua has an “outperform” call with a target price of RM2 while Nadia Aquidah of Affin Hwang Capital upgraded the stock to a “buy” on Dec 5 with a target price of RM1.77.

“In light of the better-than-expected 9MFY2019 results, we raise our FY2019E core earnings by 14.1%, but maintain our FY2020 to FY2021E earnings. Nevertheless, we are concerned over slipping TV subscriptions, which will have a more detrimental impact on valuations should the decline accelerate,” says Nadia in a report.

“Unless there is a turnaround here, we will remain fairly cautious. Nevertheless, the pullback in the stock price and attractive dividend yields (7.7% to 8.1% for FY2019 to FY2021E) have turned the stock attractive for a short-term proposition.”

However, the merger between Astro and Maxis could become a litmus test for the Malaysian Communications and Multimedia Commission (MCMC) in its efforts to become the regulator with the power to control mergers and acquisitions (M&A) in the communications and multimedia industry.

According to Shanti Kandiah of SK Chambers, a lawyer who is an expert in competition law, MCMC has taken the view that Sections 133 and 139 of the Communications and Multimedia Act 1998 allow the commission to regulate matters pertaining to M&A involving communications and multimedia companies.

It is worth noting that the Malaysia Competition Commission (MyCC) does not have the power to regulate M&A as the Competition Act 2010 neither prohibits monopoly of business nor M&A.

“The parties involved will have to satisfy MCMC that the merger does not have the effect of lessening competition within the industry,” says Shanti.

Malaysia has not seen strong opposition against M&A since the share swap agreement between Khazanah Nasional Bhd and Tune Air Sdn Bhd for stakes in AirAsia Bhd and Malaysian Airline System Bhd in August 2011. The deal was eventually aborted.

The merger between Uber Technologies Inc’s Southeast Asian operations and Grab also hit the headlines, although it was not as fiercely opposed as the AirAsia-MAS share swap.

Astro closed at RM1.36 per share last Thursday, adding eight sen or 6.25% during the day from the close of RM1.28 the previous day. Since hitting its year-to-date low of RM1.05 on Nov 14, Astro has been inching up. It reached RM1.41 on Dec 6, the highest level since Oct 15.