KUALA LUMPUR: Malaysian telecoms company Axiata Group Bhd and Norway's Telenor ASA are nearing a deal to combine their Malaysian mobile operations to create the country's top player in the highly competitive sector.

The companies said on Thursday they were in advanced talks to merge Celcom Axiata Bhd and DiGi.Com Bhd, in which the parties would each own about 33.1%.

"While the possible combination of Celcom and Digi has been on the cards before, drivers such as 5G rollout and the government's decision to intervene has shaken up the industry recently," said Mark Robinson, Asia Pacific head of TMT at Herbert Smith Freehills.

Malaysia, which plans to roll out the 5G telecommunications spectrum in stages by the end of this year, has set up a special purpose vehicle, Digital Nasional Berhad, to oversee the infrastructure and network deployment.

Last month, Celcom signed a memorandum of understanding with Huawei Technologies' local unit and CyberSecurity Malaysia to set up a 5G test lab.

"It is no secret that the telecommunications industry continues to face long-term structural headwinds of slower growth, increased operating costs and lower profits," Axiata's CEO Izzaddin Idris said in a statement.

He said that as a commercially stronger and more resilient entity, Celcom Digi Berhad, the merged company, will help "restore long-term growth and capacity to the industry, especially in terms of improved profitability".

Izzaddin told a news conference that the merged entity, with its significant financial capacity, will also be able to attract and create prominent global partnerships.

Local ownership will exceed 51% with Malaysian institutional investors owning at least 17.9% of shares in Celcom Digi, Axiata said.

The combination of the country's second and third largest mobile services providers would create a company that is estimated to have annual revenue of $3 billion, with core profitability of $1.4 billion from a subscriber base of about 19 million customers. DiGi.Com had a market value of $7 billion.

Maxis Bhd is Malaysia's top mobile services provider with more than 9.4 million revenue-generating subscribers.

Reuters reported earlier on Thursday that Axiata and Telenor were set to announce a deal involving the Malaysian mobile operations of both companies. Trading in Axiata and DiGi.Com was suspended ahead of the announcement.

Telenor's shares were up 2.5% at 1010 GMT, outperforming a 0.2% drop in the Oslo benchmark index.

NO HURDLES FORESEEN

In September 2019, Telenor and Axiata called off a proposed deal to create a telecoms joint venture with nearly 300 million customers across South and Southeast Asia, blaming "complexities".

"I personally can't foresee any hurdles that we need to cross, any challenges that we need to face, in terms of deal breakers. The 2019 exercise has given us a better understanding of each other," Izzaddin said.

He also said that the company was not looking at other mergers with Telenor.

Telenor said a transaction will realise synergies and provide value for shareholders as it further develops its Asian portfolio.

The Norwegian company, the largest shareholder in DiGi.Com with a 49% stake, has other Asian businesses in Thailand, Bangladesh, Myanmar and Pakistan.

Telenor CEO Sigve Brekke said several Asian markets will see consolidation and the group is looking at opportunities.

"In the last couple of years we've spoken of the need to affirm our positions in the five Asian markets in which we operate. This time we're doing it in Malaysia, and we're also saying we will look at opportunities in other countries," Brekke said.

As part of the latest proposed deal, Axiata will receive newly issued shares in DiGi.Com, a cash consideration from new debt in the merged company of about $400 million and a further $70 million from Telenor Group, Telenor said.

Axiata and Telenor said they will seek to finalise agreement on the proposed transaction in the second quarter following due diligence.