Potential Indosat-Tri Merger: A New Stage of Healthy Competition in the Telecommunications Industry

After the merger between XL Axiata and Axis in 2014, rumors of cellular operator consolidation continued to emerge. His partner is fickle. However, apart from Telkomsel, a number of high-ranking telecommunications industry officials did not dismiss them as opening up opportunities for consolidation for a healthier ecosystem.

At the end of 2020, the rumors began to show a bright spot. As reported Bloomberg Some time ago, CK Hutchison Limited and Ooredoo Group were reported to be exploring opportunities to merge the businesses of their subsidiaries, namely PT Hutchison 3 Indonesia (Tri) and PT Indosat Ooredoo Tbk (Indosat).

A few days after the news was revealed, Indosat Ooredoo opened its voice. In his official statement, Director & Chief Financial Officer of Indosat Ooredoo Eyas Naif Assaf confirmed that his parent company Ooredoo Group has signed an exclusive Memorandum of Understanding (MoU) and is not legally binding with CK Hutchison Holdings Limited.

"This is related to the possibility of a transaction to combine their respective businesses in Indonesia, namely PT Indosat Tbk and PT Hutchison 3 Indonesia. The exclusivity period of this MoU is valid until April 30, 2021. No further information can be disclosed at this time," he said. .

If we refer to the statement above, the public will see the results of exclusive negotiations in the next four months. DailySocial had time to contact Indosat Ooredoo and Hutchison 3 Indonesia. However, neither of them could comment much.

"We are sorry, we from management cannot provide a response regarding this matter. It would be best to ask CK Hutchison or Ooredoo Group," said Vice President Director of Hutchison 3 Indonesia M. Danny Buldansyah via short message.

Catching up with Telkomsel

Regardless of operator, Economist Fithra Faisal believes that now is the right moment to consolidate. In fact, Indosat or Tri could have consolidated several years ago, but Fithra considers the Covid-19 pandemic to be driven factors the strong one. Moreover, people are increasingly demanding better telecommunications services in the current situation.

What's complicated is that even though the ICT sector has benefited greatly from the pandemic, the telecommunications industry is not involved.

"Digital services have been widely used during this pandemic, however operators do not see the profits. "This indicates that this industry is not yet efficient," explained Fithra when contacted DailySocial. 

Based on data from the Indonesian Telecommunications Providers Association (ATSI), industrial mobile traffic rose 12,5 percent in the February-March period. Then, it rose 7,5 percent (March-April) and 5,7 percent (April-May). In the May-June period, traffic fell 0,5 percent. However, ATSI said that the increase in traffic during the pandemic was not matched by an increase in revenue. The implementation of WFH and SFH also has an impact on reducing basic operator services, namely Voice and SMS.

Therefore, in the current situation operators are considered to need a strong capital structure to ease the burden of network expansion. Moreover, operators also need to carry out their obligations to provide networks nationally as mandated by frequency licenses.

Indosat's parent company, Ooredoo Group, is a telecommunications company from Qatar that has controlled the majority stake in Indosat since 2015. Meanwhile, Tri Indonesia is controlled by CK Hutchison Holdings, which is a conglomerate from Hong Kong.

On the other hand, continued Fithra, the Indosat-Tri merger plan is the first step to catch up with Telkomsel which leads the industry. According to him, Indosat-Tri, which is considered to depend on the young customer segment, tends to have price elasticity tall one. As a result, customers can easily move to another operator if their tariff is more expensive.

Indosat Financial Performance (2018-2019/YoY)

Source: Investor Memo

Telkomsel and XL Axiata is considered to have Branding and stronger customer loyalty so users are less likely to think too much about price. As a result, customers tend to stick with the service because price elasticity-it's low.

"Because of that, Telkomsel and XL has it captive market which Indosat and Tri don't have. Therefore, Indosat and Tri will suffer if they continue to maintain cheap levels. Ultimately, they must strengthen capital and Branding them," he explained.

Network expansion, efficiency and healthier competition

The government has made efforts to create healthy industrial competition. In fact, this situation remains difficult because there were too many telecommunications operators to begin with. The frequencies being contested are not sufficient to provide maximum service quality. Not to mention the costs incurred every year to build the network and pay the frequency usage rights fee (BHP).

The tariff war to win the hearts of customers has actually created a gap in the growth of the telecommunications industry in Indonesia. ATSI General Chair Ririek Adriansyah mentioned that the Indonesian telecommunications industry recorded minus 6,4 percent growth in 2018. This is the first minus growth in history.

Contacted DailySocial, Chairman of the Telematics Society (Mastel) Institute Nonot Harsono said that this consolidation would certainly create healthier industrial competition. Especially if the scenario is that XL Axiata and Smartfren follow in their footsteps. Indonesia's dream of having just three cellular operators will be realized.

"In the telecommunications industry, the most important asset is frequency. If they consolidate, they can combine these assets so that they don't become a burden. The hope is that they won't have to return the frequency bands to the government because Tri's allocation isn't much. Even if they merge with Indosat, the difference will be Telkomsel and XL still doesn't exceed it," he said.

"We don't yet know the model of merger that will occur, whether the two entities agree on the share composition or a break-up sale. Maybe it won't be a break-up sale because it involves money cash a lot. If the sale is broken, the only thing that is valuable is the frequency. Besides, everything is a burden. Both may express conditional values. "If the regulator asks for some bands, the valuation could be different and they could ask for compensation, for example," explained Nonot.

Moreover, he continued, the current situation cannot be compared to when XL acquired Axis. According to Nonot, the government should provide something like that reward if both agree to merge. If the government guarantees that there will be no frequency withdrawals, this merger could take place.

XL Axiata and Axis are the second consolidation in the industry after Mobile-8 and Fren (now Smartfren). When XL Axiata annexed Axis for $865 million, the government asked its subsidiary Axiata Bhd to return Axis' 5MHz wide band on the 2.100MHz spectrum.

Currently, Indosat uses 20MHz wide bands at 1.800MHz and 15MHz at 2.100MHz. Meanwhile, Tri has a band width of 15MHz at 2.100MHz and 10MHz at 1.800MHz. These two spectrums are used to deploy 3G and 4G networks.

When combined, both Indosat and Tri can have an accumulated spectrum of 30MHz each at 2.100MHz and 1.800MHz which can be used to improve the quality of the 4G network.

"This is the right moment for the government to emphasize that there will be no return to frequency allocation because [if combined] the band allocation will not exceed Telkomsel and XL. Moreover, it is the government's obligation to create healthy business competition. "It is possible that this step will be followed by XL and Smartfren in the future," concluded Nonot.