On 24th March 2025, Axiata Group Berhad (‘Axiata’) held an Extraordinary General Meeting (‘EGM’) to vote for the Proposal of the Merger of PT XL Axiata TBK, PT Smartfren Telecom TBK and PT Smart Telecom. The outcome of the EGM was overwhelming, as 99.9958% of the shareholders voted in support of the proposal whilst 0.0042% voted against the proposal. (‘Axiata Merger Proposal’). A very interesting corporate exercise and well worth to understand its rationale and mechanism.
SUMMARY OF AXIATA MERGER PROPOSAL
(Extracted from Circular to Shareholders in relation to the Proposed Merger of PT XL Axiata TBK, PT Smartfren Telecom TBK and PT Smart Telecom and Notice of Extraordinary General Meeting dated 7th March 2025 by Axiata Group Berhad)
On 15th May 2024, Axiata announced a non-binding memorandum of understanding with Sinar Mas to explore merging their Indonesian telecom units, PT XL Axiata Tbk (‘XL Axiata’) with PT Smartfren Telecom Tbk (‘Smartfren’). The goal is to create a stronger telecommunications provider while both companies maintain joint control.
By 10th December 2024, definitive agreements were signed, which are the Conditional Merger Agreement (where parties agree on the structure of the merger), Shareholders’ Deed (where parties agree to undertake certain obligations in regards to the merger), Conditional Share Purchase Agreement (where parties agree that XL Axiata and Sinar Mas Shareholders shall hold equal shares in MergeCo) and Shareholders’ Agreement (where parties agree on pre and post-merger obligations, ownership and governance structures post completion of merger).
Interesting to note that parties agreed that the governing law is in accordance with English law and any dispute is to be referred and finally settled by arbitration by the Singapore International Arbitration Centre in accordance with the Arbitration Rules of the Singapore International Arbitration Centre.
The merger involves transferring all assets, liabilities, and businesses of Smartfren and PT Smart Telecom (‘ST’) to XL Axiata in exchange for shares. A secondary transaction, the Proposed Equalisation, will see Axiata dispose of 13.14% of MergeCo (XL Axiata as the surviving legal entity and resulting merged entity following the merger of the businesses of Smartfren, ST and XL Axiata by way of a statutory merger in accordance with Indonesian law) shares to PT Bali Media Telekomunikasi (‘BMT’) for USD 475 million. Post-merger, XL Axiata will be renamed PT XLSmart Telecom Sejahtera Tbk and shall remain listed on the Indonesia Stock Exchange (‘IDX’).
The merger is guided by Indonesia’s corporate laws and regulations. Once completed, Smartfren and ST will dissolve without liquidation, while XL Axiata assumes all their rights and obligations. The new shares will rank equally with existing XL Axiata shares but will not be entitled to past dividends. MergeCo will also incur short-term costs for integration, funded by internal resources or borrowings.
A share buyback option is available for dissenting shareholders, capped at 10% of XL Axiata’s issued shares. Additionally, XL Axiata plans to distribute USD70 million in dividends post-merger, subject to financial conditions.
This merger is set to strengthen Indonesia’s telecom sector, creating a more resilient third player to compete with Telkomsel and Indosat-Hutchison. The consolidation will optimise infrastructure, enhance network reliability and improve service quality. It also supports the rollout of 5G technology, essential for Indonesia’s digital transformation. Indonesia’s telecom market is evolving, with subscriber growth driven by increased digital adoption. The merger will enhance market competition, stabilise pricing and drive further investment in digital services.
Despite its benefits, the merger carries risks. Approval from regulatory bodies is required, and any failure to meet conditions may derail the deal. Cultural and operational differences between XL Axiata and Smartfren could slow integration and limit synergies. Changes in Indonesian telecom regulations may impact licensing and financial performance. MergeCo’s separation from Axiata could impact credit ratings and borrowing costs. Additionally, the merger must comply with Indonesian competition laws to prevent market dominance concerns.
LEGAL OPINION ON THE AXIATA MERGER PROPOSAL
The issued shares of Smartfren and ST have been properly authorised and fully paid up. The Sinar Mas Shareholders (collectively PT Wahana Inti Nusantara (“WIN”), PT Global Nusa Data (“GND”), PT Bali Media Telekomunikasi (“BMT”) and PT Gerbangmas Tunggal Sejahtera (“GTS”)) and Smartfren legally own their respective shares and assets. No known legal obstacles affect these ownerships aside from disclosed exceptions.
The merger agreements are legally binding under Indonesian law and all counterparties have the legal capacity to fulfil their obligations. Required approvals include regulatory clearance from the Financial Services Authority of Indonesia, stock exchange listing approval and government authorisations for spectrum and licenses.
Indonesia generally respects foreign law provisions in contracts but courts occasionally apply local laws despite such clauses. Foreign arbitration awards, such as those from the Singapore International Arbitration Centre, are enforceable in Indonesia if they comply with international conventions and local regulations.
Indonesia’s foreign investment laws permit full foreign ownership in telecom services. However, pay-TV and telecom construction businesses are subject to restrictions. MergeCo, as a public company, is exempt from foreign ownership limits.
There are no exchange controls on dividend repatriation, but transfers must comply with Bank Indonesia’s foreign exchange regulations. Large transactions require supporting documentation to ensure compliance with capital control measures.
EXPERT REPORT ON TAXATION POLICIES IN INDONESIA
The proposed merger of XL Axiata, Smartfren and Smartfren’s subsidiary, PT Smart Telecom (“ST”), marks a transformative step for Indonesia’s telecommunications industry. This strategic consolidation is designed to enhance operational efficiencies, strengthen market position, and drive technological innovation. Axiata Group Berhad (“Axiata”) indirectly owns 66.53% of XL Axiata. Upon completion, XL Axiata will emerge as the surviving entity under the new name PT XLSmart Telecom Sejahtera Tbk (“XLSmart”).
Post-merger, Axiata and Sinar Mas will retain joint control of XLSmart, each holding a 34.8% ownership stake. The combined entity aims to capitalise on Axiata’s regional expertise and Sinar Mas’s established presence in Indonesia, creating a financially robust organisation capable of delivering seamless connectivity, innovative digital solutions, and spearheading advancements in 5G, artificial intelligence, and cloud-based services. By integrating the strengths of the three companies, XLSmart is positioned to play a pivotal role in advancing Indonesia’s digital economy and expanding mobile network coverage to millions of users.
A crucial consideration for this merger is the taxation landscape in Indonesia. According to the expert report prepared by PricewaterhouseCoopers Taxation Services Sdn Bhd (“PwC”), Indonesian tax regulations impose a 22% corporate income tax on resident companies, with exemptions on dividend income received from domestic limited liability companies. Furthermore, Indonesia maintains double taxation treaties with various nations, including Malaysia, to prevent fiscal evasion and minimise tax burdens on cross-border transactions.
Transfer pricing regulations in Indonesia require entities with direct or indirect shareholding of at least 25% to price transactions with related parties at arm’s length. Compliance with these rules is monitored by the Indonesian Tax Office, which has the authority to adjust transactions deemed inconsistent with market standards. Additionally, the Ministry of Finance mandates companies meeting specific criteria to maintain transfer pricing documentation, including Master Files, Local Files, and Country-by-Country Reports.
The report also highlights capital gains taxation, which applies to corporate taxpayers at the standard rate. However, gains from the transfer of land and buildings are subject to a final income tax of 2.5% based on the transaction value. For listed shares, sales proceeds are taxed at a final withholding rate of 0.1%, with an additional 0.5% tax applicable to founder shares at the time of an initial public offering.
Regarding foreign investments, the rules on controlled foreign company (“CFC”) in Indonesia stipulate that income derived from CFCs—including dividends, interest, and capital gains—is subject to deemed dividend taxation if Indonesian taxpayers hold a 50% or greater stake. Exceptions exist for reinvested income, which may be exempted if it contributes to business activities within Indonesia. Moreover, foreign-sourced income received by Malaysian tax residents is now subject to taxation, with exemptions on dividend income applying until the end of 2026.
Indonesia’s value-added tax (“VAT”) system imposes a standard 12% rate on taxable goods and services, with exemptions and zero-rated treatment applicable under specific conditions. Additionally, repatriation of profits is subject to withholding taxes, with rates of 20% on dividends, interest, and royalties—reducible under tax treaties. Notably, technical and management fees are not subject to withholding tax if services are fully rendered offshore.
Foreign exchange controls in Indonesia are relatively relaxed allowing the free movement of capital. However, companies must report all foreign transactions to Bank Indonesia. Transactions within Indonesia are generally required to be conducted in Indonesian Rupiah.
The proposed merger represents a significant step forward in Indonesia’s telecommunications sector, enhancing competitiveness, operational efficiency, and digital innovation. With a comprehensive understanding of taxation policies and regulatory considerations, XLSmart is well-positioned to navigate the evolving landscape, driving sustainable growth and improved connectivity for millions of Indonesians.
FURTHER INFORMATION
The Circular to Shareholders outlines critical aspects of the proposed merger, key responsibilities of Axiata’s Board of Directors (‘Axiata Board’) and financial obligations.
One of the fundamental components discussed in the document is the role of Maybank Investment Bank. which serves as the Principal Adviser for the merger. Several other entities have played a role in ensuring the integrity of the merger process. Assegaf Hamzah & Partners, acting as Indonesian legal counsel, has provided a legal opinion and memorandum, confirming no foreseeable conflicts of interest. Similarly, Alliance Islamic Bank Berhad, the expert responsible for assessing the fairness of the Combination Consideration and Issue Price, has conducted an independent review. PwC Tax has also contributed as the taxation policy expert, ensuring clarity on Indonesian tax implications for the merger.
Financial commitments and contingent liabilities form another crucial part of the document. As of 31 January 2025, Axiata has committed RM1.29 billion in capital expenditure for property, plant, and equipment. Additionally, contingent liabilities amounting to RM742.7 million, primarily from ongoing litigation and claims, could potentially impact the company’s financial position.
The Circular further informs shareholders of essential documents available for review at Axiata’s registered office. These include the company’s Constitution, audited financial statements for the last two years, and unaudited statements for 2024. Shareholders can also inspect key legal agreements, expert reports on fairness considerations and tax implications, and market research findings relevant to the merger.
Overall, the Circular provided the shareholders with a comprehensive understanding of the proposed merger, including financial considerations, legal assurances, and corporate responsibilities. The document reinforces the Axiata’s Board’s commitment to transparency and due diligence, ensuring shareholders can make informed decisions ahead of the upcoming EGM.