February 23, 2017 / 10:07 AM / 6 months ago

Fitch: Jio Prompts More Consolidation with Bharti-Telenor Deal

(The following statement was released by the rating agency) SINGAPORE, February 23 (Fitch) The agreement by Bharti Airtel Limited (BBB-/Stable) to buy Telenor's Indian telecom operations is the latest sign that the entry of aggressive new operator Reliance Jio is spurring incumbents to consolidate to better meet the intense competition and weaker telcos to exit altogether, Fitch Ratings says. Bharti's credit profile will remain unaffected by the planned acquisition as the benefits from additional spectrum assets will offset the spectrum liabilities taken over. We retain our negative outlook on the sector for 2017, as fierce competition and rising capex will put pressure on most operators in the short term. Jio's massive investment of USD20bn-25bn and unprecedented offering of free voice and data for six months to new subscribers have accelerated industry consolidation. The on-going consolidation is likely to leave four larger operators - Bharti, Jio, the combination of Vodafone India and Idea Cellular, and the combined Reliance Communications Limited (B+/Negative) and Aircel Limited. Vodafone India and Idea Cellular are planning to merge their operations to combine spectrum assets, strengthen balance sheets and reduce cost and capex to compete effectively. Reliance Communications is also in the process of merging its wireless operations with Aircel. We continue to believe that competition will continue to remain high, and the consolidation is not likely to return any pricing power to the operators in the near term. Bharti announced today that it has signed a definitive agreement to buy Telenor's Indian telecom operations. In Fitch's view, the 43MHz of 1800MHz spectrum Bharti will acquire as part of the transaction is the primary benefit to the company. Telenor's Indian operations will also come with 45 million subscribers (compared with Bharti's Indian subscriber base of 266 million), who generate revenue of USD600m-700m and EBITDA of USD50m-60m (compared with USD14.5bn and USD5bn-5.3bn, respectively at Bharti). This will increase Bharti's revenue market share by 2% to around 35%. As a part of the transaction Bharti will take over the deferred spectrum liabilities, which we will treat as future capex. We do not envisage the transaction to result in any other increased debt at Bharti. The additional spectrum in seven Indian telecom coverage areas, or circles, acquired from Telenor will bolster Bharti's 4G spectrum portfolio and allow it to better serve rising data usage by subscribers. The deal is subject to approval from telecom regulators, Indian courts and anti-trust authorities, and could be completed in the next 12 months. We expect Bharti's EBITDA for the financial year to March 2017 (FY17) to be around USD5bn-5.3bn (FY16: USD5bn) despite intense competition in the Indian mobile market during 2HFY17 (excluding Telenor's operations) given its diversified business profile, with its African operations accounting for about 15% of EBITDA and its Indian non-mobile business contributing 23%. Bharti's EBITDA fell for the first time in 3QFY16, to USD1.3bn (run-rate quarterly EBITDA of USD1.4bn), as some of its data traffic moved to Jio's network, which offers free voice and data services till March 2017. Its cash generation was, however, supported by better EBITDA growth in tower, Pay-TV and Enterprise businesses during this period. We estimate that Bharti's FFO-adjusted net leverage for FY17 will be around 2.0x (FY16: 1.8x; excluding USD5bn deferred spectrum costs) - lower than the threshold of 2.5x, above which Fitch may consider negative rating action. Bharti could raise funds by monetising a part of its 72% stake in its tower entity, Infratel. Bharti sold 2.9% stake in Infratel for USD310m in 2015. For more information, see the commentary <a href="https://www.fitchratings.com/site/pr/1018406">Fitch: Vodafone/Idea Merger Won't Ease Indian Telco Competition, published on 1 February 2017. Contact: Nitin Soni Director Corporates +65 6796 7235 Fitch Ratings Singapore Pte Ltd. One Raffles Quay South Tower #22-11 Singapore 048583 Janice Chong Director Corporates +65 6796 7241 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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