True and Dtac Merger Discussions Highlight Need for Large Scale among Thai Telecom Operators
The discussion between the Norwegian telecommunications group, Telenor ASA, and the largest Thai conglomerate, Chareon Pokphand Group (CP Group), to explore a merger of their telecommunications activities in Thailand highlights the importance of scale for generate cost savings against a backdrop of slow growth in the Thai telecommunications sector and high investment, according to Fitch Ratings.
Telenor and CP Group announced on November 22 their intention to merge Thailand’s second and third largest telecommunications operators; True Corporation Public Company Limited (TRUE) and Total Access Communication Public Company Limited (DTAC; AA (tha) / Negative).
CP Group and Telenor are proposing an equal stake in the listed merged entity, with the remaining stake to be held by minority shareholders of TRUE and DTAC. The parties aim to reach an agreement in 1Q22, subject to board, shareholder and regulatory approvals.
We believe the deal was driven by a need for scale, as it is difficult for small Thai telecommunications companies, including TRUE and DTAC, to absorb 5G investment costs without an immediate return on investment. Meanwhile, the leading national telecommunications company, Advanced Info Service Public Company Limited (AIS; AA + (tha) / Stable), has a strong balance sheet to support 5G investments and enjoys economies of scale through its large subscriber base.
The deal is expected to generate long-term synergies to allow TRUE and DTAC to compete on data pricing and network capacity. It will also strengthen the merged entity’s position as Thailand’s largest mobile operator, bringing its mobile revenue market share to over 50%, from 32% for TRUE and 22% for DTAC at the end of September 2021. The broadening of the spectrum will also allow the merged TRUE -DTAC to better compete with AIS.
We believe that industry consolidation will support price stability and long-term profitability. Competition in mobile tariffs has been rational in 2021, although the difficult business environment could lead to tactical pricing strategies to preserve market share. The merger is also expected to result in investment and operating savings, depending on strong execution to quickly integrate operations and networks.
However, DTAC’s better position in the market will be offset by the higher leverage effect of the merged entity. We expect the combined entity’s pro forma net debt / EBITDA to be approximately 5.2 times post-merger. DTAC’s EBITDA (before TFRS16) for the 12 months to September 2021 was THB 22.6 billion, with net debt / EBITDA of 2.3x at the end of the period. Meanwhile, TRUE posted EBITDA of THB 30.8 billion and Net Debt / EBITDA of 7.4x.
We will assess the impact of the merger on DTAC’s ratings once the transaction becomes more certain. The evolution of the parent-subsidiary relationship of Telenor and DTAC could lead to a reassessment of the level of parental support of the subsidiary. We are rating DTAC on a bottom-up basis and the Thai telephone company receives a notch increase to reflect a moderate strategic link with Telenor, which has strong control over DTAC’s board and management.
DTAC is struggling to maintain its market share in an environment of intense competition, a lower spectrum portfolio and poor network coverage. It is also looking to secure additional spectrum, particularly the mid-3.5 GHz band, for its medium-term 5G deployment.
TRUE faces cash flow pressure from high investments and slower market share gains. We expect TRUE’s free cash flow to remain negative over the next two years, putting additional pressure on its tight balance sheet.