Indonesia's XL Axiata confirms merger talks with Smartfren

XL Axiata and its smaller rival Smartfren – a unit of Indonesian conglomerate Sinar Mas – confirmed they have signed a memorandum of understanding (MoU) paving the way for merger talks.

The plan under discussion would see XL and Smartfren take equal stakes in the merged entity, which they have dubbed 'MergeCo' for the time being. They would also have an equal say in the company's strategic direction and operational decisions.

Talks are at an early stage and a deal might not materialise, so it's too early to talk numbers. However, some rough, back-of-the-envelope calculations based on recent financial reports and market cap suggests the combined entity would have an enterprise value somewhere in the region of $4.5 billion-$4.7 billion.

"With the intent to create a stronger telecommunications service provider in Indonesia, the proposed merger of XL Axiata and Smartfren is expected to bring together the combined scale, competencies, finances and deep telecommunication expertise of Axiata and the local scale and market knowledge of Sinar Mas to generate significant value," said Axiata, in a statement.

"We believe that the proposed transaction will benefit Indonesia, the telecommunications sector, and stakeholders, by more effectively supporting Indonesia's digital aspirations and needs," said Smartfren, in a stock exchange filing. "The combined entity expects to deliver superior customer experience and create additional shareholder value through synergies."

The combination of XL Axiata and Smartfren would boast offer much stiffer competition to Indonesia's two other MNOs, Telkomsel and Indosat Ooredoo Hutchison (IOH).

As it stands today, XL and Smartfren have 57.5 million and 36.5 million mobile customers respectively, leaving them a distant third and fourth behind IOH with 100.8 million, and even further behind market leader Telkomsel, which has 159.3 million. If the MergeCo deal goes ahead, the combined company would have 94 million customers, putting it within touching distance of IOH.

Perhaps more importantly is how the proposed merger stands to benefit their networks.

Market leader Telkomsel boasts an impressive 198,000 4G base stations, followed by IOH, which has a still mighty 184,000. It's a bit of drop to XL, which has almost 105,000, and then there's Smartfren, with its decidedly modest-by-comparison 46,000.

MergeCo would still trail IOH in terms of footprint – particularly once overlapping sites are taken out of commission. It would nonetheless make a marked difference to XL and Smartfren's reach.

Should a deal get done, it will be the second major round of consolidation in Indonesia since the $6 billion merger between Indosat Ooredoo and CK Hutchison. Agreed in September 2021, the transaction closed fairly swiftly the following January after ticking all the necessary regulatory boxes.

With Indonesia's population of climbing north of 270 million, and just four big MNOs to serve them, it will be interesting to see if the Indonesia Competition Commission (ICC) is happy to let that number shrink.