he country’s two smallest mobile operator companies PT XL Axiata Tbk and PT Smartfren Telecom officially merged into PT XLSmart Telecom Sejahtera Tbk, consolidating the country’s mobile operator industry to three players. The Rp 104 trillion (US$6.5 billion) merger was seen as inevitable as the telecom industry is saturated. As the industry becomes more concentrated, the risk of oligopoly also emerges.
The XL Axiata and Smartfren merger plan was set in motion in 2021. On Dec.10, XL Axiata and Smartfren signed a definitive merger agreement, with the publicly listed XLAxiata as the surviving company, and they submitted their corporate action to the Financial Services Authority (OJK) and Communications and Digital Ministry for approval. Once approved, they expect the merger to be completed in first semester of 2025.
XL Axiata and Smartfren agreed their equity value at the merged entity at a ratio of 72 to 28. As a result, Axiata Group Berhand will own 47.9 percent of XLSmart, while Sinar Mas will own 21.7 percent. However, both Axiata and Sinar Mas agreed to split their ownership share to 34.8 percent each, with 30.4 percent owned by the investing public. To achieve that, Sinar Mas will purchase an extra 13.1 percent of XLSmart from Axiata in cash at $400 million to be paid at the completion of the merger and another $75 million on the first anniversary of the merger.
XL Axiata and Smartfren hold the third and fourth positions in market share, accounting for 21 percent and 5.3 percent of market share respectively. The new entity, XLSmart, will have 94.5 million subscribers and Rp 45.4 trillion revenue per year. Their combined market share of 26.3 percent, however, is still behind Telkomsel and Indosat Ooredoo Hutchison, which lead the market with substantial shares of 40.3 percent and 33.4 percent respectively.
As the competition becomes tighter, several mergers and acquisitions have taken place. In 2022, Indosat Ooredoo and Hutchison 3 of Hong Kong merged. In 2013, XL Axiata took over Axis, a mobile operator owned by Saudi Telecom Co. (STC). Mergers among companies in the telecom industry aim to gain synergy and a larger market share. The merger of XL Axiata and Axis, for example, resulted in 4.3 percent higher average revenue per user (ARPU) during 2013 and 2014.
Telkomsel, Indonesia's largest telecommunications provider, reported the highest ARPU in the industry at Rp48,000 in 2023. While the ARPU of XL Axiata was at Rp 41,000, Indosat at Rp 35,600, Smartfren was at the bottom at Rp26,000.
The increasingly saturated telecommunications market has led to declining profit margins, creating challenges for XL Axiata and Smartfren. In 2023, XL Axiata’s net income margin fell to 1.43 percent, down from 4.81 percent in 2022. Smartfren reported a loss of Rp108.9 billion, with its net income margin dropping sharply from 9.5 percent in 2022 to minus 0.9 percent in 2023. In contrast, Telkomsel and Indosat Ooredoo Hutchison maintained significantly higher net income margins at 21.4 percent and 8.8 percent, respectively.
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