October 13, 2017 / 6:19 AM / 2 years ago

Fitch: Indian Telco Consolidation Continues with Bharti-Tata Deal

(The following statement was released by the rating agency) SINGAPORE, October 13 (Fitch) Bharti Airtel Limited's (BBB-/Stable) announcement that it plans to acquire the consumer mobile operations of Tata Teleservices and Tata Teleservices (Maharashtra) Ltd (Tata Telecom business) is positive for the deal participants as well as the industry, Fitch Ratings says. Bharti's credit profile will improve slightly as it is paying no consideration for the operations, which it would acquire free of debt. Fitch believes the benefits from additional spectrum, fibre assets and subscribers will more than offset the additional spectrum liabilities. The deal would help arrest the decline in Bharti's EBITDA and bolster its 4G spectrum portfolio and network position. Tata Telecom will exit the consumer mobile segment, avoiding future investment requirements and potential further losses. Assuming the deal completes in 2018, the headroom on Bharti's 'BBB-' ratings will improve slightly, as we expect its FFO-adjusted net leverage to be around 2.0x-2.1x in the financial year ending March 2019 (FY19), compared with our expectation of 2.1x-2.2x at FYE18. These levels of leverage remain close to the threshold of 2.5x above which we will consider negative rating action. We forecast revenue and EBITDA to recover in FY19 with a growth of 3%-5% after a decline by at least 5% in FY18. FY18 financial performance will be affected by intense price competition and lower mobile termination rates. However, the telecom regulator's decision to allow deferred spectrum liabilities to be paid over 16 years instead of 10 years will improve cash flows for all telcos, including Bharti. Bharti will gain about 178.5 MHz of spectrum in the 850MHz, 1800MHz and 2100MHz bands in 17 Indian telecom coverage areas, the right to use Tata Telecom's extensive fibre network and 42 million subscribers that will add to its existing Indian subscriber base of 281 million. We estimate the consumer mobile business of Tata Telecom generated revenue of around USD1.1 billion-1.2 billion and a small EBITDA profit in FY17, compared with Bharti's revenue of USD14.7 billion and EBITDA of USD5.4 billion. Bharti's revenue market share will increase by 4pp-5pp to around 37%-38%. We will treat the deferred spectrum liabilities that Bharti will take over, as future capex. We estimate Bharti will take over only a small part of Tata Telecom's deferred spectrum liabilities of USD1.5 billion. We do not expect the transaction to result in any other increase in debt at Bharti. Tata Telecom will not transfer the USD6.2 billion in on-balance sheet debt and will retain its enterprise business, retail fixed-line and broadband businesses, along with its stake in tower operator Viom Networks. Tata Telecom will be responsible for the liabilities associated with Viom Networks. The deal is subject to approval from the telecom regulator, Indian courts and anti-trust authorities, and could be completed in the next 12 months. The deal is part of industry consolidation that has been accelerated by the entry of aggressive new operator Reliance Jio. Since Jio's launch in September 2016, the industry has consolidated into three large operators from over 10 participants. Weaker telcos have had to exit the market by selling their operations to the stronger telcos, which have had to rethink their long-term plans. During 2016-17, Telenor sold its Indian operations to Bharti, while Videocon sold its spectrum assets to Idea Cellular and exited the industry. The second- and the third-largest operators, Vodafone India and Idea Cellular, decided to merge to combine spectrum assets, strengthen balance sheets and reduce cost and capex to compete effectively. Reliance Communications (Rcom, RD) entered into a standstill period with its lenders until end-2017 to provide time for the company to reduce its USD7 billion in debt. However, it cancelled a deal with Aircel to merge wireless operations, citing regulatory and competitive reasons. Both Rcom and Aircel are short of sources of capital to trade their way out of difficulties. As of July 2017, Jio has gained about 129 million customers, in less than a year, though its investment of USD29 billion has been massive. Its aggressive pricing strategy means that its revenue market share of 4%-5% is much lower than its subscriber market share but we expect this to rise to more than 10% by 2018. However, we expect that its tariffs will have to rise in the medium term if it is to earn an acceptable return on its significant investment. Contact: Nitin Soni Director Corporates +65 6796 7235 Fitch Ratings Singapore Pte Ltd. One Raffles Quay South Tower #22-11 Singapore 048583 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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