Axiata and Bharti finally sign off on Sri Lanka merger

The telcos are pitching the deal as a merger, but Axiata is effectively buying Bharti out, leaving it with a small stake in the merged entity.

It's a stock deal that will see Axiata's local unit Dialog Axiata take 100% of the shares of Airtel Lanka and in return confer on Bharti Airtel a 10.355% stake in the enlarged business. The companies did not give any indication of a monetary valuation.

The deal still requires the approval of Dialog shareholders and completion of various other closing conditions – we don't have a target completion date as yet – including the green light from the Colombo Stock Exchange. It has already met the approval of Sri Lanka's telecoms regulator though, which bodes well for a swift conclusion after many months of discussion between the parties.

The pair formally announced merger plans in May last year although the Indian press has been reporting on a possible tie-up for almost a decade. The Economic Times' sources claimed share swap talks were taking place between the telcos as long ago as 2016.

"The Telecommunications Regulatory Commission of Sri Lanka (TRCSL) has granted its approval for the proposed merger, underscoring its vision to advance the adoption of telecommunications services across Sri Lanka," Bharti Airtel said in a statement.

That the regulator believes the deal will be good for the market gives us a clear indication that all is not running smoothly in Sri Lanka's telecoms space.

When it updated its market analysis of Sri Lanka in January, analyst firm Paul Budde noted that the macro-economic situation has hit telecoms in Sri Lanka, with operators struggling to raise the revenues they need to fund network upgrade and rollout. The country has always had high mobile penetration thanks to customers carrying multiple SIMs, but of late the number of active mobile users has fallen; the year to September 2023 recorded a 3.1% decline, Paul Budde reports.

As an aside, Paul Budde claims the Dialog/Airtel tie-up was first mooted in 2015. In the intervening years there was some consolidation, Hutchison Sri Lanka acquiring Etisalat's local unit in 2018. The Dialog/Airtel deal will reduce a one-time five-player market to three. While that wouldn't fly from a regulatory point of view in many markets – the European Union springs to mind – clearly the TRCSL is keen to help shore things up for the telcos.

It's also worth noting that the state is keen to attract investment into incumbent operator Sri Lanka Telecom, whose Mobitel unit is one of the three remaining mobile operators in the country. It was making headway earlier this year, announcing it had received applications from three entities keen to qualify to take part in the sale. But the process was derailed last month when one of the three, Lyca Group, which failed the pre-qualification phase, took legal action.

As the Tamil Guardian reported, the Sri Lankan Court of Appeal issued an interim order to suspend the share sale process on the back of Lyca's complaint.

That situation is still up in the air, but it stands to reason that a stronger operating environment for telcos can only aid the privatisation process in the long run.

For now, the telcos themselves are naturally positive on the merger agreement, talking up economies of scale, reduced duplication of infrastructure, and synergies in technology and capex.

"The integration of Dialog and Airtel Lanka operations will unlock new opportunities for innovation and growth, and this will lead to benefit [for] consumers," said Ashish Chandra, CEO of Bharti Airtel Lanka, one of a number of executives to share similar comments.

"This merger brings together the strengths of two leading telco groups and bodes well for the growth and sustainability of Sri Lanka's flagship telecom sector," added Hans Wijayasuriya, CEO Telecommunications Business at Axiata.

Clearly the regulator agrees. Presuming Dialog's shareholders are on board, there's no reason to think this will not be a done deal in the fairly near future.