• Media reports speculate on a potential StarHub-M1 merger
• We assume that StarHub can acquire M1 at 7-8x EV/EBITDA using debt financing
• StarHub&rsquo s earnings could increase by 16%-37% in FY25F-27F with Keppel&rsquo s market cap potentially benefitting by 4-6% 
• Maintain BUY on  StarHub  and  Keppel  with unchanged TPs of SGD1.44 and SGD9.00 respectively without factoring any M& A

Media reports speculate on potential StarHub-M1 merger.  According to an article published in &ldquo The Edge&rdquo , StarHub (STH) and M1 are exploring a potential merger of their businesses. STH has declined to comment on the article hence any merger is highly speculative at this stage.  However, we think that Keppel Ltd (Keppel) could be interested in selling M1 as (i) recovery in M1&rsquo s earnings from mobile roaming is almost complete, and a strategic shift to the enterprise market has already borne fruit with revenues nearly tripling since privatisation (ii) Keppel has embarked on an asset light strategy with monetisation of non-core assets M1 can be considered as non-core to Keppel&rsquo s transformation to become a global asset manager, in our view. 

In our scenario analysis, we assume that STH can acquire M1 at 7-8x EV/EBITDA using 100% debt financing.   M1&rsquo s present book value is estimated to be slightly over S$1.3bn after divestment of its network assets. Hence, Keppel could seek a minimum enterprise value of S$1.7bn including M1&rsquo s debt on our estimate. This is slightly higher than STH&rsquo s 12-month forward EV/EBITDA of 6.2x, who can potentially utilise the debt for the acquisition. Under these assumptions, STH&rsquo s net debt to EBITDA could rise to 3.2x post-merger and normalise to below 2.5x in 3-4 years.  

Singtel, with similar revenue share, commands ~37% EBITDA margins in Singapore suggesting big room for the merged entity&rsquo s margins to improve from ~20%.  Admittedly, Singtel commands higher-end consumer and enterprise customers, but it also reflects sub-optimal scale of StarHub&rsquo s & M1&rsquo s business.  For the merger, we assume consolidated revenue uplift of 0.5%-1.0% for StarHub in FY25F-27F from cross-selling of fixed broadband, cybersecurity, and other solutions. We estimate consolidated opex savings of 3%-5% in FY25F-27F.  Both companies have overlapping enterprise business units with significant room to cut costs. The number of retail shops in adjoining areas also be reduced while head quarter and other fixed costs also be reduced considerably.