Indonesian telcos ink US$6.5 billion merger to create XLSmartIndonesian telcos ink US$6.5 billion merger to create XLSmart

The new entity – which already has a name: XLSmart – will have a pre-synergies enterprise value of 104 trillion rupiah, or around US$6.5 billion, the operators announced on Wednesday.

That's more than we expected when the pair first announced they were holding tie-up talks back in May, but the terms of the arrangement and the rationale behind it remain the same.

Axiata Group and Smartfren owner Sinar Mas will become joint controlling shareholders of XLSmart, each holding a 34.8% stake. They will have equal influence over its strategic direction and decisions-making.

Technically though, Smartfren and subsidiary SmartTel will be subsumed into XL Axiata. To account for the fact that XL Axiata is a larger entity, Axiata will receive up to US$475 million to equalise the shareholdings; that's $400 million when the deal closes and a further $75 million after the first year of operation of the new entity, the latter payment hinging on satisfaction of certain conditions.

The companies expect the deal to close in the first half of next year. That's a fairly short timeframe, which perhaps reflects their confidence that it will pass through the regulatory process without too much difficulty. Indeed, they said the transaction already has the support of the Indonesian government, as well as of their own investors; the boards of all three entities have given it the green light too.

This is a merger that would raise more than a regulatory eyebrow in the European Union, given that it reduces the number of mobile network operators in Indonesia to three from four. But there is no indication that authorities in Indonesia would take such a stance.

The tie-up will create a much stronger third player in the market – XL Axiata and Smartfren sit in third and fourth spots respectively at present – and a credible competitor to the big guns: Telkomsel and Indosat Ooredoo Hutchison.

If all goes to plan, XLSmart will launch with a mobile subscriber base of approximately 94.5 million, based on Q3 figures, and a market share of 27%, the companies said. It will generate pro forma revenues of IDR45.4 trillion (US$2.8 billion) and EBITDA of over IDR22.4 trillion (US$1.4 billion), and annual run-rate pre-tax synergies are estimated at $300 million-$400 million.

To put that in some context, Telkomsel and Indosat Ooredoo Hutchison both have over 100 million mobile customers, the former – and market leader – exceeding that threshold by some margin.

The creation of XLSmart essentially evens up the market, and that's something that could well find favour with competition bodies.

Nonetheless, the telcos are making all the usual comments designed to curry favour with the authorities.

"At Sinar Mas, we often say, 'Together, we go far, fast, and beyond.' This brings added value to customers and employees, while supporting the Indonesian Government's efforts to encourage digitalization," said Franky Oesman Widjaja, Chairman of Sinar Mas Telecommunications and Technology.

"We deeply appreciate the support of the Government, the dedication of all employees, partners, and suppliers, and, of course, the trust of investors, which have made this merger possible. XLSmart now has the opportunity to further contribute to serving the public and support the development of Indonesia's digital economy," he said.This deal will likely get the thumbs-up, but it makes sense to highlight the benefits to the country as a whole, just in case.