In February 2014, Celcom, one of the largest mobile operators in Malaysia by market share, announced a major transformation of its technology platform. The company wanted to get ahead of the competition, and said it was launching a service that would “take customer experience to another level”.
That level turned out to be a few notches lower. The roll-out did not go as planned, facing “teething problems” as one analyst gently put it at the time. The snafu meant that Celcom’s aim of launching new subscriptions were delayed, and its reputation was damaged.
Jamaludin Ibrahim, the president and chief executive of Celcom’s parent company Axiata, reacted quickly. He shook up the management team, picking Michael Kuehner, a former chief executive of Axiata’s Bangladesh business, to run Celcom.
Ibrahim now sounds philosophical about the episode. He told FinanceAsia that Celcom had enjoyed 31 quarters of earnings growth in a row before the technology mishap. “But,” he said of the numbers, “when they fell, unfortunately they fell big time.”
The profit slide has acted as a drag on Axiata’s share price ever since. But the problems at Celcom have also shifted focus among investors to Axiata’s treasure trove of subsidiaries — a company portfolio that, one way or the other, looks certain to change in the coming years.
THE POWER OF NOW
When Ibrahim met FinanceAsia, he was in the middle of a series of informal meetings with investors in Hong Kong.
CLSA’s 23rd Investors’ Forum was in full swing, and Ibrahim was making the most of the crowds to talk with potential investors in Axiata and its listed subsidiaries: XL Axiata in Indonesia, Dialog in Sri Lanka, M1 in Singapore and Idea in India. (Celcom, the flagship Malaysian entity, is not separately listed.)
Ibrahim, a three-decade veteran of the IT and telecommunications sectors, is no stranger to being badgered by investors. But on this trip, he sensed something different, a concern with near-term questions — in particular, surrounding Celcom and XL Axiata, the Indonesian subsidiary — instead of long-term projections.
“Rather than talk so much about the future, this time around I have spent more time talking about the key issues today and in the near-term,” he said. “Those are questions we expect investors to be concerned about, so I want to tackle it head on.”
The questions arose not just due to the troubles at Celcom two years before, but also the struggle of XL Axiata to adjust to a data-centric business model. They were heightened further by a raft of news reports ahead of Ibrahim’s trip claiming that Axiata was planning a series of stake sales, including a potential sale of part of the Indonesian entity.
This would not be against the ethos of Axiata, a company that has proved a bountiful source of deal volumes over the years. But Ibrahim said — and analysts agree — that now would be a poor time to sell a stake in XL Axiata.
Since hitting Rp6,486 in September 2014, XL Axiata’s share price has fallen more than 60%. The stock has tumbled as the company struggles with a shift from its voice call-centred mobile business to a model that focuses more on selling data packages — and in particular, that focuses on more profitable customers.
“The timing is not right at all for us to do any kind of sell-down, if we do decide to do that,” he said. “We believe in the future — and right now, given the industry’s problems and our problems, why would we want to sell?”
But he does admit Axiata has been considering stake sales at some of his companies since the middle of last year.
In that regard, Axiata is spoiled for choice.
TAKE YOUR PICK
Axiata has businesses across southeast Asia, thanks in part to an acquisitive streak over the last five years. The most eye-catching deal was its $1.35 billion purchase of Nepal’s Ncell last year. But the company has made several smaller acquisitions across the region over the last five years.
Robi, the Bangladesh subsidiary, was merged with Bharti Airtel in a deal that gave Axiata a 68.7% controlling stake. XL Axiata bought mobile network operator Axis for $865 million in 2014. Axiata bought Latelz, a Cambodian mobile operator, for around $180 million in early 2013. Axiata’s Sri Lankan business Dialog has made several small acquisitions.
Most of these deals were not big enough to move the needle on their own. After all, Axiata had RM41.1 billion ($9.78 billion) in assets at the end of 2013, as well as a comfortable total debt-to-Ebitda of 1.8, according to data from S&P Capital IQ.
But the sum of acquisitions — and, in particular, the impact of the Ncell purchase — has had a clear impact on Axiata’s balance sheet. In its second half results this year, the company’s asset base had risen to a whopping RM66 billion. But its total debt-to-Ebitda had gone in the same direction — rising to 2.7.
This is perhaps why talk has turned to possible divestments. Not all of Axiata’s subsidiaries are potential stake sale candidates, but Ibrahim appears to be keeping an open mind about cashing in at least part on his holding in these companies.
He does, however, refute the idea that the sales will be motivated by the company’s debt load. He says the company’s debt can be paid off without trouble simply by future earnings. The motivation for divestments will, instead, be to fund more acquisitions.
“It’s not debt driven; it’s strategy-driven,” Ibrahim said. “Shall I sell-down and build a war-chest to make acquisitions, or shall I wait for them to appear and then sell-down? That is the difference.”
One of the companies potentially on the chopping block is Dialog, the Sri Lankan subsidiary. Nomura analysts estimated the company could net around $195 million from selling around 30% of the company. That would still leave Axiata with a 53% holding.
Ibrahim said the company has made no firm decision on the stake sale yet, but it is clear from hearing him talk that he is keeping all options on the table. It will all, in the end, come down to a question of price.
THE GREAT GAME
Ibrahim, a consummate dealmaker, speaks about Axiata’s business like a grand strategist. He is most animated when talking about the big picture, figuring out what “game” one of the subsidiaries should play or explaining the misunderstood challenges of shifting from voice to data.
But when he talks strategy there are echoes of another industry — banking. Like mobile operators, tumbling revenues and disruption from technology start-ups has threatened banks. That has led the top-tier banks to trim their client bases, concentrating only on those clients that pay most.
The mobile industry is not at that point just yet, and Ibrahim says his subsidiaries are still playing “the same old game” in India and Bangladesh, where there is still plenty of room for subscriber growth. But in much of Asia, the focal point is not subscriber numbers but ‘wallet share’.
“The banks went through that process many years ago,” he said. “We want customers to spend more with us because they have data needs, they have an iPad, maybe they have another phone, or eventually they want a fixed-line cable in their home, or they want TV products.”
The emphasis on integration should give investors some sense of Ibrahim’s plans for the future. The investors he met at the CLSA forum may have focused more on the short-term, but as the grand strategist, Ibrahim appears to always keep an eye on the horizon.
This is reflected in his optimism about Celcom. He does acknowledge the short-term worries of investors. But he sounds a note of confidence about what’s to come, and reminds investors quite how strong the company has been in the past.
“The next one or two years are all about the turn-around first,” he said. “It’s not so much about trying to conquer the world. It’s about getting back to the point where we can grow faster than the industry all over again — just like we have for the last eight years.”
