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True and Dtac Merger Talks Highlight Necessity of Scale at Thai Telcos
The discussion between Norway telecom group, Telenor ASA, and Thailand’s largest conglomerate, Chareon Pokphand Group (CP Group), to explore a merger of their telecom businesses in Thailand underscores the significance of scale to drive cost efficiencies amid the Thai telecom sector’s slow growth and high investment, says Fitch Ratings.
Telenor and CP Group announced on 22 November that they plan to merge Thailand’s second-and third-largest telecom operators; True Corporation Public Company Limited (TRUE) and Total Access Communication Public Company Limited (DTAC; AA(tha)/Negative).
CP Group and Telenor are proposing equal ownership 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 approvals from boards, shareholders and regulatory authorities.
We believe the deal has been driven by a need for scale, as it is challenging for small Thai telcos, including TRUE and DTAC, to absorb 5G investment costs without an immediate return on investment. Meanwhile, the leading domestic telco, Advanced Info Service Public Company Limited (AIS; AA+(tha)/Stable), has a strong balance sheet to support 5G investment and benefits from economies of scale due to its large subscriber base.
The deal should drive 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, raising its mobile revenue market share to over 50%, from TRUE’s 32% and DTAC’s 22% as of end-September 2021. The enlarged spectrum holdings also will enable the merged TRUE-DTAC to better compete against AIS.
We believe industry consolidation will support long-term price stability and profitability. Competition in mobile tariffs has been rational in 2021, although the challenging business environment could drive tactical pricing strategies to preserve market share. The merger should also result in capex and opex savings, depending on strong execution to swiftly integrate both operations and networks.
Fitch Ratings
However, DTAC’s better market position will be offset by the higher leverage of the merged entity. We expect pro forma net debt/EBITDA of the combined entity to be around 5.2x post-merger. DTAC’s EBITDA (pre-TFRS16) for the 12 months to September 2021 totalled THB22.6 billion, with net debt/EBITDA of 2.3x at the end of the period. Meanwhile, TRUE posted EBITDA of THB30.8 billion and net debt/EBITDA of 7.4x.
We will assess the merger’s impact on DTAC’s ratings once the transaction becomes more certain. Changes to the parent-subsidiary relationship of Telenor and DTAC could prompt a reassessment of the level of parental support for the subsidiary. We rate DTAC on a bottom-up basis and the Thai telco receives a one-notch uplift to reflect moderate strategic linkage with Telenor, which has strong board and management control over DTAC.
DTAC is struggling to retain market share amid intense competition, an inferior spectrum portfolio and low network coverage. It is also seeking to secure additional spectrum, particularly the mid-band 3.5GHz, for its 5G rollout in the medium term.
TRUE faces cash flow pressure due to high investment 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 stretched balance sheet.
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