Maxis prepares to relist in Malaysia's largest IPO ever

The Malaysian stockmarket is getting ready for its largest initial public offering ever and it is a familiar face that will be rejoining its ranks. Just over two years after Maxis Communications (MCB) was privatised by its controlling shareholder, Malaysia's largest provider of mobile communication services is about to return with an IPO that looks set to raise about $3 billion.

Like most other companies that are relisted following a privatisation, however, it is a smaller and more streamlined company that is currently being pre-marketed. Most notably, the company's mobile businesses outside Malaysia -- primarily the mobile operations in India and Indonesia -- will stay with the unlisted parent company. The change is signalled by the fact that the unit preparing for a listing is named Maxis Berhad, while Maxis Communications will remain a private entity that will hold the international businesses as well asa controlling stake in Maxis Berhad (from here on referred to as Maxis).

Sceptics have noted that Maxis is the portion of the company that remains after the high-growth businesses in India and Indonesia has been taken out, suggesting that this will be a much less exciting business than it was before it was taken private in June 2007. This is indeed true -- at least with regard to the removal of the fastest growing portions of the business -- though the feedback from domestic investors, in particular, suggests there are still reasons to be excited.  

Sources involved in the offering note that, before the privatisation, investors were not that keen on the international business, which they saw as a drain on the company's cashflow. Indeed, much of what the company was earning from the steady and cash-generative domestic operations went straight into the funding of its overseas expansion, leaving shareholders with few benefits and a lot of execution risk.

A similar argument is outlined by Maxis in the preliminary listing prospectus as it lists the reasons behind the buyout and de-listing: The principal shareholder at the time, Ananda Krishnan-controlled Binariang, believed that the overseas expansion [existing and future] "would significantly change the financial and risk profile of MCB due to uncertainties surrounding the investment and regulatory environments in new markets, the substantial capital expenditure required, which may strain MCB's cashflow and dividend payment capability, and the increase in gearing to finance such...investments in new markets, which may result in higher borrowing costs."

"As such, Binariang undertook the privatisation of MCB as it believed that private ownership would accord greater flexibility for MCB to realise its vision to be a leading telecommunications company and to adopt a capital structure consistent with the change in its funding and risk profile," Maxis said.

"Previously the minority shareholders didn't get much of the yield. Now, the interests of the parent company and the minority shareholders are aligned," said one source, noting that Maxis has promised to pay out 75% of its annual earnings as dividends. "The company is giving the market what it wanted two years ago."

What investors who buy into the restructured listing candidate will get is a company with a leading position in the domestic market and very strong cashflow generation -- the free cashflow yield is estimated at 6%-7%. Given its size, Maxis will also be a bell-weather stock in the Malaysian market and is expected to go into all the benchmark indices, meaning investors who follow Malaysia or the telecom sector will pretty much have to buy it. Meanwhile, domestic investors are already well-familiar with the company and its ability to make money.

That should ensure a successful IPO at least, but that is not to say that Maxis will be an instant hit once it starts trading. Malaysia is a mature mobile market with a 100% penetration rate and while Maxis is the dominant player with a 46% share of the post-paid market and 38% of the pre-paid subscriptions, it does have competition from the number two and three players -- Celcom, which is owned by Axiata (formerly TM International), and DiGi.

"People don't question the quality [of Maxis], they question the growth and how much competition there is in the market," said the earlier quoted source.

The level of competition will be of particular importance in the wireless broadband segment of the market, which is viewed as a key growth area, particularly in light of the fact that 50% of the Malaysian population is estimated to be younger than 25. The country already has 15.9 million internet users and, over the past three years, they have increasingly started to access the internet through various mobile and wireless devices.

However, in a sense, the Malaysian telecom market is less competitive than other Asian markets as the key players have been expanding overseas and, just like Maxis did in its previous reincarnation, they use their domestic operations to fund this expansion. As a result, the Malaysian telecom operators have refrained from price wars that may have had a negative impact on their cashflow and margins. Aside from the mobile business, Maxis also offers fixed-line and international gateway services.

Maxis will be offering 30% of the company, or 2.25 billion shares, all of which are existing shares sold by MCB. About 7.8% of the deal will be earmarked for retail investors and another 50% will be offered to Malaysian investors recognised as Bumiputras (indigenous investors). The remainder will be split between other domestic institutional and international investors. Reducing the number of available shares even further, sources say the company is in discussion with a number of potential cornerstone investors.

Because of its greater market share, analysts argue that Maxis should trade at a premium to DiGi and Axiata, which indeed it did when it was listed as MCB. DiGi, which is viewed as the closest comparable because most of its businesses are in Malaysia, currently trades at a 2010 enterprise value-to-Ebitda multiple of 7.3 and at a price-to-earnings ratio of 14.9 times. Analysts estimate its free cashflow yield at 6.8%.

Axiata, which aside from Malaysia also has mobile operations in Indonesia, Cambodia, Mauritius, Thailand, Sri Lanka, Bangladesh, Pakistan, Iran and Singapore, trades at a 2010 EV/Ebitda multiple of 7, a P/E ratio of 16.8 times and at a free cashflow yield of 4.5%.

While Maxis will only set the price range ahead of the formal roadshow, which is scheduled to kick off on October 23, there is a maximum price of M$5.50 per share attached to the Bumiputra tranche. That price would value Maxis at an EV/Ebitda multiple of 9.6 and a P/E multiple of 16.5 and would imply a free cashflow yield of 6.2%.

A price of M$5.50 per share would also suggest a deal size of M$12.4 billion ($3.6 billion). That will be more than double Petronas Gas's $1.1 billion IPO in 1995, which still ranks as the country's largest listing, according to Dealogic. Maxis Communications' own IPO in 2002 raised $803 million, which makes it the second largest.

Maxis' final price is expected to be fixed in the week of November 9 and the shares should start trading by mid-November. CIMB, Credit Suisse and Goldman Sachs are joint global coordinators and joint bookrunners for the offering, with J.P. Morgan, Nomura and UBS joining them at the bookrunner level.