PETALING JAYA: The Celcom-Digi merger is just a step away from completion, but

the heat is on Axiata Group Bhd as its credit profile is likely to weaken.
The merger will erode the earnings quality of Axiata, and an acquisition-fueled
increase in leverage adds further pressure to Axiata’s credit profile, said S&P Global
Ratings.

The ratings on Axiata (BBB+) are on CreditWatch with negative implications to reflect
a likely downgrade to BBB, following the substantial completion of the Celcom-Digi
merger, it said.

Axiata’s weaker earnings quality will translate into a commensurately lower debt
tolerance at the BBB+ rating level.

S&P believes the company will breach this tighter leverage threshold. By its
estimates, Axiata’s debt-to-earnings before interest, taxes, depreciation and
amortisation (ebitda) ratio will rise to 2.7 times to 2.8 times in 2023, from about 2.2
times in 2021. This assumes that all the acquisitions are complete and that the
Celcom-Digi merger proceeds.

It said Axiata’s leverage has risen following its series of acquisitions. Over the past
12 months, the company has undertaken close to RM9bil worth of acquisitions.

This rising debt comes amid a likely decline in earnings quality. The merger will
weaken Axiata’s earnings quality, mainly due to the loss of direct control over cash
flows from wholly-owned Celcom, which has contributed about a quarter of Axiata’s
ebitda.

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Its view is that, post the transaction, Axiata’s adjusted ebitda, which will include
dividends from the merged entity Celcom-Digi, will become more volatile.

That is because dividends are likely to fluctuate with Celcom-Digi’s other cash flow
needs, such as capital expenditure.
Last week, the Securities Commission gave its blessing to the merger between
Axiata’s wholly owned unit, Celcom Axiata Bhd and Telenor ASA’s Digi.com Bhd .