Bharti Airtel has signed a binding agreement to merge its Sri Lankan unit into market leader Dialog Axiata through a stock deal which will create a stronger number one in the country.
In a joint statement on Tuesday, the companies said under the pact Bharti Airtel will be granted a stake in Dialog, representing fair value of Airtel Lanka. Bharti Airtel will accordingly be issued new shares in Dialog upon completion of the deal.
“Dialog Axiata Plc, Axiata Group Berhad and Bharti Airtel Limited, have entered into a binding term sheet to combine operations of Bharti Airtel Lanka (Private) Limited, Airtel’s wholly-owned subsidiary with Dialog, a subsidiary of Axiata Group Berhad,” said the joint statement.
The companies said discussions with respect to the proposed merger are ongoing between the two parties and with relevant regulatory authorities.
“The proposed transaction is subject to signing of definitive agreements and necessary closing conditions including applicable regulatory and shareholder approvals,” said the statement.
ET had earlier reported that the two companies were in talks for combining operations in 2016, in line with Bharti Airtel’s merger with Axiata’s Bangladesh arm.
The all-stock deal in Sri Lanka will see Axiata remain the majority shareholder, while Bharti Airtel could become a strategic minority shareholder in the combined entity, said experts.
Axiata had 82.74% holding in Dialog as of December 31, 2021.
Dialog is the largest telecom service provider in Sri Lanka with more than 17 million subscribers as of 2021, representing around 51% of the market. Airtel Lanka has about 5 million subscribers.
The 2016 report cited people with knowledge of the matter saying a key hurdle was the Competition Commission of Sri Lanka, which might have issues with the merger since Dialog Axiata already controlled more than half the country’s mobile phone market.
That said, a merger with the market leader will propel Airtel Lanka from a minority player to becoming part of an entity which is the largest telecom operator in Sri Lanka.
In 2021, ratings agency Fitch had reiterated its prediction that Airtel Lanka would seek a merger or be acquired by a rival, due to the overwhelming investment needed to remain competitive in Sri Lanka.
“We expect further sector consolidation and believe Airtel Lanka, a subsidiary of Bharti Airtel Limited (BBB-/Negative), may seek M&A due to mobile competition and higher taxes amid high capex requirements,” the agency said in a 2021 statement.
A previous Fitch report said market leader Dialog Axiata had “sufficient headroom for the company to undertake a debt-funded acquisition of a small operator”.