TMT &A NEWSLETTER 2Q2019

AXIATA AND What are the driving forces of the merger plan and where are the synergies?

Stefano Sorrentino, Adriano Giaquinta, Rui Wang TELECOM MARKET Why is Reliance investing so heavily in digital technologies? AND TELENOR PLAN TO MERGE THEIR ASIAN OPERATIONS

(1) Except for Telkomsel, as 4Q Norwegian-based multinational tele- largest telco group in the ASEAN and 2018 results not yet released. Consensus estimates CY 18 com, Telenor, is in discussions to merge SAARC regions by revenue size (See used instead. with Malaysian-based Axiata Group Exhibit 1a and 1b)]; Global Tower Com- (2) Post merger revenue of in an all-share deal that is expected pany (i.e. the combination of edotco MergedCo accounts for Telenor’s DTAC, Telenor to leave Telenor with 56.5% share of Group, the tower subsidiary of Axiata Myanmar, , the merged company and Axiata with Group, and Telenor Asia assets), which and Telenor , as well 43.5%. is the fourth largest tower company in as Axiata’s , XL, Smart, and Dialog. It excludes The global merger would form three the world operating roughly 60,000 and , Axiata’s distinct entities: MergedCo, the com- towers across Asia; and a Regional In- and OpCos. bination of the two aforementioned novation Centre, which would develop companies [which will also become the innovative products and solutions.

EXHIBIT 1a Ranking of major telco operators in the region by revenue Revenue in Calendar Year 20181, US$ billion

MergedCo MergedCo (2) 12,50 1st Axiata & Telenor Single market player Telkomsel 9,12 Regional market player (ASEAN & SAARC) Airtel 8,64

Telenor Asia 6,72 3rd

Singtel 6,00

Reliance Jio 5,76

Axiata 5,76 6th

AIS 5,28

Globe 2,88

Maxis 2,16

Indosat 1,68

Source: Axiata Investors Presentation, Value Partners analysis.

EXHIBIT 1b Selected pro-forma financial and operational indicators of MergedCo

ESTIMATED MERGEDCO ESTIMATED MERGEDCO NUMBER OF COUNTRIES NUMBER OF COMBINED REVENUE: EBITDA: WITH OPERATIONS: SUBSCRIBERS:

US$ 12.5 BILLION US$ 5.0 BILLION 9 >300 MILLION

2 TMT M&A NEWSLETTER 2Q2019 MergedCo would be a leading player Synergies from the merger are in Asia with operations in 9 countries expected in at least 3 areas: cost savings, digital services, and 5G Currently, the companies share a presence in and Bangladesh “The bottom line is we need the scale, we through their Operating Companies need the synergy, we need the balance (OpCos). However, only Axiata’s Bang- sheet, we need the strong capabilities of ladeshi operations, Robi, are not part of both companies. If we can combine that the proposed merger. Axiata also has it will be powerful,” Axiata group CEO a presence in , , Sri Jamaludin Ibrahim told a news confer- Lanka, and Nepal. Telenor has OpCos in ence after the initial announcement. , Myanmar, and Pakistan. Post- Through merging the two businesses, merger, MergedCo would have mobile not only will MergedCo be saving - operations in 9 markets and be among tional expenditure and internal manage- the top 3 operators in terms of sub- ment costs, but such savings will also scriber share in each of these markets enable the innovation that MergedCo (see Exhibit 2). needs to compete in the evolving telco market.

EXHIBIT 2 Axiata and Telenor’s subscriber share by country

Axiata & Telenor Axiata Telenor Others

MALAYSIA BANGLADESH* THAILAND MYANMAR PAKISTAN

22% AXIATA 24% 30% 22% 33% 29%

50%

28% TELENOR 78% 67% 71% 46%

NEPAL CAMBODIA INDONESIA

17% 41% 36% 48%

59% 64% 52%

83%

Source: GSMA Intelligence, company annual reports and presentations, Value Partners analysis. Note: (*) in Bangladesh, only Telenor’s operations are included in the merger, Axiata-owned Robi is not part of the merger.

3 TMT M&A NEWSLETTER 2Q2019 (3) “Leveraging Digital 1. Most of the cost synergies are 2. Digital services from both companies Technologies to achieve new expected to come from MalaysiaCo will be integrated into a Regional growth: how should telcos act?”, July 2019, by Stefano but concerns have been raised Innovation Centre, but what is the Sorrentino, Adriano on the headcount reduction digital strategy of the combined entity? Giaquinta, Chin San Ng [www.valuepartners.com/en/ leveraging-digital- MalaysiaCo, the combined Malaysian Axiata has a vision of being a “new technologies-to-achieve- new-growth-how-should- entity formed from the OpCos of the generation digital champion” by 2021, telcos-act]. two companies (Axiata’s Celcom and focused around a “triple core strategy of Telenor’s Digi) will be the country’s telco, digital, and infrastructure busi- largest mobile operator, functioning as nesses,” which all have the potential a subsidiary of MergedCo but remaining to become fully integrated and inter- separately listed. Some estimate that connected. It currently owns Boost, MalaysiaCo will provide approximately a cashless transaction service, ada, a US$1 billion in cost synergies for Axiata digital advertising agency, and Apigate, and Telenor, mainly through operational an API platform. Additionally, Telenor expenditure savings from the removal has a heavy digital / IoT focus, providing of duplicate network sites, sharing of IT cloud storage apps, mobile banking, and system platforms, and rationalization of data protection services for users. Post- sales and marketing expenses. merger, US$23.9 million is expected to be pledged annually to fund the Region- Given these estimates, what is the plan al Innovation Centre, which would be to unlock the true value of these syner- responsible for integrating these digital gies? Usually, telcos’ sales and market- solutions. ing operations account for 20% to 30% of the NPV of the synergy plans. However, not all digital technologies will deliver the value that telcos seek. However, Axiata and Telenor have A recent study published by Value already claimed that there will be no Partners (3) shows that, for example, forced retrenchment of Digi’s 1,700 and Media & Content, Cloud Computing, and Celcom’s 2,700 employees, in response Cybersecurity verticals carry relatively to concerns raised regarding the ex- higher risks, and lower synergies for pected headcount reduction. telcos because of higher development costs, stronger competition from non- Further, merging two legacy networks telcos, and tightening industry regula- into an integrated one is a complex tion, whereas FinTech, IoT, and Block- process, and might take 3 years or more chain hold the highest synergies and on average. The 2 telcos will therefore largest monetization opportunities. need to manage the expectations of the Axiata’s and Telenor’s shareholders various stakeholders affected. will expect to see a digital transforma- Customers, for example, expect stable tion roadmap in the near future that and consistent services throughout the highlights a joint investment strategy in integration process, while shareholders digital technologies. on the other hand, will push for a more rapid disposal of excess base stations.

4 TMT M&A NEWSLETTER 2Q2019 (4) Licensing basis of 3.5 GHz 3. Will the combination of technological From a financial point of view, consider- band is for high speed know-how and financial resources put ing the need for investments in new 5G mobile data services (i.e. not specified for 5G). MergedCo ahead of competitors in the spectrum license, the increasing capital (5) Average of prices for 5G era? expenditure for network expansion and 2300 MHz, 2600 MHz, upgrades, and the need to operate a and 3500MHz auctions. Among all the countries that MergedCo high-power consumption 5G network, will operate in, 5G has been listed as Axiata and Telenor might be under a top priority in the next 2 to 5 years. substantial financial pressure. Governments from Bangladesh, Myan- They will need to invest separately and mar, and Cambodia have announced 5G simultaneously in multiple countries, rollout plans, and 5G trials have already and most of the countries that Merged- commenced in Thailand, Malaysia, Indo- Co would operate in also have similar nesia, and Sri Lanka. timelines for 5G spectrum release plans.

Combining the financial resources and Besides, the final prices in spectrum auc- technological know-how from both Tel- tions are unpredictable (see Exhibit 3): enor and Axiata, MergedCo should be well prices of certain frequency bands could equipped to win the race in the 5G era. vary significantly due to competition, However, like any other operator, the the number of bidders, different auction combined entity will be facing numerous structures and auction types, spectrum issues surrounding 5G. scarcity in the country’s telecom sector, operators’ financial constraints, etc.

EXHIBIT 3 Overview of 5G spectrum prices Mid-band (1-6 GHz) spectrum auctions, final prices, USD / MHz / Pop / Year

MHZ 350 200 150 280 200 120 50 390 200 125 390 SOLD

~0.021 ~0.020 ~0.018

~0.008 ~0.007 ~0.007

~0.002 ~0.003 ~0.003 ~0.003 ~0.001

IRELAND CZECH UK SOUTH KOREA SPAIN MEXICO LATVIA FINLAND ITALY SAUDI REPUBLIC (4) ARABIA (5)

AUCTION MAY 2017 JUN 2017 APR 2018 JUN 2018 JUL 2018 AUG 2018 SEP 2018 OCT 2018 NOV 2018 DEC 2018 JAN & MAR 2019 DATE

Source: ITU, European 5G Observatory, GSMA, Bloomberg, AGCOM, TeleGeography, Value Partners analysis.

5 TMT M&A NEWSLETTER 2Q2019 Moreover, 5G spectrum investments are What does it take for Axiata and likely to include strict network obliga- Telenor to successfully merge their tions. Often times, regulators release businesses? certain spectrum bands under the condition that operators deploy their 5G “No merger will be successful without a network within a tight timeframe, or that mutually shared vision and plan for how they reach a target population coverage to integrate the businesses”. Telenor (e.g. in Hong Kong such obligations are CEO Brekke acknowledged that integra- clearly stated ahead of the auctions), tion risk and differences in organization- increasing financial pressure on telcos. al culture are a concern. Post-merger, MalaysiaCo would be expecting a blend of cultures, governance, management styles, technologies, etc.

Mergers and acquisitions are a vital means to grow a business quickly, yet many M&As fail to create shareholder value. Shareholders of both parties ex- pect them to set clear directions for the deal (by defining objectives, philosophy and principles of the merger), lay out a clear plan to unlock value from the syn- ergies, design a well-balanced corporate governance structure for the combined entity, and reach a shared understand- ing on 5G opportunities. Mergers and acquisitions are a vital means to grow a business quickly, yet many M&As fail to create shareholder value.

6 TMT M&A NEWSLETTER 2Q2019 ANOTHER INVESTMENT IN A TECH STARTUP BY RELIANCE JIO

In April 2019, Indian mobile operator The Haptik acquisition is part of Reli- Reliance Jio acquired 87% of the Indian ance Industries’ broader strategy to startup Haptik, which was founded in drive the transformation of the digital 2013, for approximately US$100 mil- lives of Indian consumers by providing lion. The startup delivers conversational them with a 360 degrees service across AI services to more than 100 million connectivity, e-commerce, media, enter- devices, and has processed more than 1 tainment, financial services, education, billion interactions so far. Reliance Jio, a agriculture and healthcare. subsidiary of the conglomerate , first entered the Indian mo- To drive this transformation, Reliance bile market in 2016 with an aggressive has set three main objectives: enrich its marketing strategy, offering free voice digital portfolio (which already includes calls and free 4G data. Today, Reliance AI services, music streaming, logistic Jio is India’s #2 telecom operator behind services, and computing software -Idea, with over 300 million services), strengthen its e-commerce customers, and capturing about 26% of strategy and positioning in India, and the subscriber share (see Exhibit 4). achieve technological leadership.

Digital proposition Objective #1 – Enrich digital portfolio EXHIBIT 4 Indian mobile subscriber share by player, as of March 2019 Besides Haptik, over the last 3 years, 100% = 1,162 million mobile subscribers Reliance Industries has been acquiring majority stakes in several other digi- tal startups, including Saavn, a music streaming service, and Reverie Lan- OTHERS 16% guage Technologies, a language service that aims to create equality on the 26,3% Internet (see Exhibit 5 next page).

With these acquisitions, the company aims to enrich its digital portfolio by

24,4% leveraging the growth in digital content consumption in India, which is driven by media, entertainment, and gaming.

33,3%

Source: company reports, news articles, Value Partners analysis.

7 TMT M&A NEWSLETTER 2Q2019 The data below are a testament to this Digital proposition. growth: Objective #2 - Strengthen e-commerce

• By 2020 India is expected to become Recently, Reliance Industries has been the 2nd largest video-viewing audi- focusing on strengthening Reliance Jio ence globally, driven by the increas- and ’s core capabilities, ing adoption of mobile services (90% with the ultimate goal of uniting them of watch-time happens on mobile to create a new e-commerce platform devices) that combines the customers and data of Reliance Jio with the offline exten- • Revenues from digital music account sion of Reliance Retail. Reliance Jio has for more than 70% of the whole been defined as the highway that will music industry in India make the development of the digital ecosystem possible, and mobile-based • Online gaming is set to grow to US$1 software as a service (SaaS), big data billion in 2021 (vs. US$ 290 million in analytics, AI and automation tools, cloud 2016) services, and blockchain technologies will be the pillars of this ecosystem.

EXHIBIT 5 Reliance Industries’ Acquisitions of AI-based and technology startups

COMPANY YEAR SEGMENT TOTAL INVESTMENT STAKE

JUNE 2016 AND AI (FLEET MANAGEMENT, AUTOMOTIVE, US$24 MILLION 37.4% SEP 2018 SECURITY, SURVEILLANCE)

MARCH 2018 MUSIC DIGITAL US$104 MILLION 81.7% STREAMING

APRIL 2018 AI-BASED EDUCATION US$180 MILLION 72.7% PLATFORM PROVIDER

FEBRUARY 2019 LANGUAGE TECHNOLOGIES US$28 MILLION 83.3% DEVELOPMENT (VOICE TECH)

FEBRUARY 2019 HIGH-PERFORMANCE COMPUTING (HPC) US$31 MILLION 83.0% SOFTWARE SIMULATION SERVICES

MARCH 2019 LOGISTICS SERVICES US$20.6 MILLION 83.0% PLATFORM

MARCH 2019 SOFTWARE SOLUTIONS WITH SPECIFIC US$11.5 MILLION 82.0% FOCUS ON PHARMA SECTOR

APRIL 2019 CONVERSATIONAL AI US$100 MILLION 87.0% PLATFORM

Source: Company reports, news, Value Partners analysis.

8 TMT M&A NEWSLETTER 2Q2019 With its AI conversational services, the Digital proposition. acquisition of Haptik is set to strengthen Objective #3 – Establishing techno- Reliance’s e-commerce strategy and fuel logical leadership the creation of a digital ecosystem. The Haptik acquisition also reinforces the On paper, there could not have been a company’s attempt to establish techno- better time for Reliance Jio to further logical leadership in India, where the low- invest in e-commerce – the market in ARPU environment (see Exhibit 6) makes India is expected to grow to US$200 bil- it tough for operators to compete only lion by 2026 (vs. US$38.5 billion in 2017), on core services. retail e-commerce sales show an 18% CAGR over the next few years, and new By establishing itself as a technological e-commerce regulations aim to protect leader, Reliance Jio might justify a price domestic players, by banning Foreign Di- premium (vs. other competitors whose rect Investment (FDI) in inventory-driven propositions are mostly around core e-commerce models and prohibiting e- telecommunication services), capture a commerce firms from pushing merchants larger share of wallet from its existing to sell exclusively on their platforms customers (e.g. by offering new value- (which was Amazon’s and ’s added digital services), and acquire new model for some product categories). customers (through a more appealing value proposition).

EXHIBIT 6 India: mobile market blended ARPU

MONTHLY RELIANCE JIO ENTERED BLENDED THE MARKET AND OFFERED ARPU, INR FREE MOBILE SERVICES

200

196

156 174 130

104

89

JUN 2013 DEC 2013 JUN 2014 DEC 2014 JUN 2015 DEC 2015 JUN 2016 DEC 2016 JUN 2017 DEC 2017 JUN 2018 DEC 2018

Source: BMI Research, Company annual reports, Value Partners analysis.

9 TMT M&A NEWSLETTER 2Q2019 So far, this strategy has paid off: Reli- One of Haptik’s applications might be ance Jio has the highest ARPU (INR 130 within cost centers such as customer per month in December 2018, vs. Airtel’s care, which hold the largest digitaliza- INR 104 and Vodafone-Idea’s INR 89); tion opportunities for telcos. AI-based the lowest churn rate of the industry (at customer care services would help 0.75% per month); an industry-leading Reliance Jio cut customer-care related EBITDA margin of 39% (during FY 2018- costs by at least 10%, based on compa- 19); and a healthy customer engagement rable experiences. To achieve a suc- (average data consumption per user per cessful transition towards a high-tech month of 10.9 GB, and average voice customer care model, Reliance Jio must consumption per user per month of 823 ensure the incorporation of 3 key suc- minutes). cess factors: digital mindset across the organization, buy-in of key stakehold- ers within the organization, and strong But will Reliance be able to deliver engagement from the IT department tangible value from its digital to integrate new digital solutions into businesses? legacy systems.

As we have seen, most macro factors in Haptik might also be able to boost the India look favorable. Demand for digital adoption of Reliance’s e-commerce services is booming. E-commerce services (similar to what Alexa did for is on the rise. Online retail sales are Amazon). However, in the e-commerce expected to grow double-digit. Cutting- space, the company will face tough edge technologies such as AI have the competition from Amazon, which potential to expedite the adoption of claims over 150 mn registered users and new digital services and enhance the monthly traffic of 365 mn visits – and customer experience. However, in India, Flipkart (invested by Walmart last year), willingness to pay for digital services which has 100 mn registered users remains low at this moment, and Reli- and 221 mn monthly visits. Despite ance Jio might need to wait longer than unfavorable regulations, both players expected to see its digital businesses are well-positioned to fight any new delivering tangible value. entrants and are not new to defending their footholds in foreign markets.

Given these circumstances, when and how will Reliance generate tangible value from its digital investments? What In India, willingness to pay is the plan to unlock the true value from the recent acquisitions? Before closing for digital services remains another deal in the tech space, Reli- ance should share how much value the low, and Reliance Jio might company has created from its previous acquisitions. Its shareholders would need to wait longer than definitely appreciate that. expected to see its digital businesses delivering tangible value

10 TMT M&A NEWSLETTER 2Q2019 ABOUT

Published by Value Partners is a global management valuepartners.com Value Partners consulting firm with a proven track record Management Consulting in the Telecoms, Media, and Technology Milan 1402, 14/F, Harcourt House (TMT) industry. Turin 39 Gloucester Road London Wanchai We have worked for the vast majority Rio de Janeiro Hong Kong of TMT players around the world over Buenos Aires

July 2019 the past 25 years, including regulators, Shanghai government agencies, industry Hong Kong Written and edited by: associations, service providers, and Stefano Sorrentino, strategic investors. Stefano Sorrentino Adriano Giaquinta, Partner, Hong Kong office Rui Wang We also possess one of the largest TMT [email protected] practices worldwide, as we collaborate For more information with the leading Telecom, Media, and Adriano Giaquinta on the issues raised in Content players globally, on projects that Engagement Manager, Hong Kong office the report please contact span the full universe of telecom & media [email protected] the authors technologies – fixed, wireless, broad-

If you would like to subscribe band, satellite, broadcast – and range Rui Wang or to be removed from our from customer segmentation, to product Associate, Hong Kong office mailing list please write to: launch, market entry, strategic alliances, [email protected] [email protected] and M&A.

Copyright © Value Partners Over the past decades, we have advised Management Consulting most of the leading private equity firms All rights reserved on multiple transactions, supporting them in a seamless and holistic man- ner through both buy-side and sell-side services, including origination (target identification and target readiness), deal execution (due diligence, valuation and negotiation), portfolio management (post-deal integration, business enhancement and transformation), exit planning (exit story, buyers identification, vendor due diligence), sale execution (sale process, due diligence process), and closing (bid evaluation, negotiation support).

11 TMT M&A NEWSLETTER 2Q2019