Bharti Airtel–Tata deal part of consolidation in telcos after RJio's entry: Fitch
Merging is being done on a debt-free cash-free basis, except for Bharti Airtel assuming a small portion of the unpaid spectrum liability of Tata’s towards the DoT, which is to be paid on deferred basis.
Consolidation move has become quite a trend now in Indian telcos, every now and then there is one company merging with another to increase their market share and customer base.
Such trend has been accelerated since the time Mukesh Ambani's Reliance Jio entered the market creating a disruption among its rival with aggressive free offers.
Latest one would be Bharti Airtel decision to merge Tata Group's consumer mobile operations (CMB) which are Tata Teleservices and Tata Teleservices (Maharashtra) Limited.
Fitch Ratings believe Bharti Airtel – Tata telecom business deal is positive for not only participants but also for the industry as a whole.
On industry as whole, Fitch said, '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.
As of July 2017, Jio has gained about 129 million customers, in less than a year, though its investment of $29 billion has been massive.
For Bharti - Tata deal, Nitin Soni Director of Fitch Ratings said, “Bharti's credit profile will improve slightly as it is paying no consideration for the operations, which it would acquire free of debt. The benefits from additional spectrum, fibre assets and subscribers will more than offset the additional spectrum liabilities.”
Bharti will gain about 178.5 MHz of spectrum by acquiring Tata's 850MHz, 1800MHz and 2100MHz bands in 19 Indian telecom coverage areas. Also Tata Telecom's extensive fibre network and 42 million subscribers will be added to Bharti Airtel's 281 million Indian subscriber base.
Soni added, “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.”
By FY17, the consumer mobile business of Tata Telecom generated revenue of around $1.1 billion-1.2 billion and a small EBITDA profit in FY17, compared with Bharti's revenue of $14.7 billion and EBITDA of $5.4 billion. Bharti's revenue market share will increase by 4pp-5pp to around 37%-38%.
Also, Tata Telecom will not transfer the USD6.2 billion in on-balance sheet debt in Bharti.
In this regards, Fitch said," 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 $1.5 billion. We do not expect the transaction to result in any other increase in debt at Bharti."
It added, "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."
Interestingly, a Phillip Capital recently warned about the acquisition that it might face limited regulatory hurdles from TRAI from an M&A guidelines perspective. The two major hurdles are that
spectrum caps and revenue market share (RMS) should not exceed 50% in any of the circles.
Assuming that the deal closes by 2018, Fitch said, “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.”
Fitch has forecasted revenue and EBITDA to recover in FY19 with a growth of 3%-5% after a decline by at least 5% in FY18. However, it added, FY18 financial performance will be affected by intense price competition and lower mobile termination rates.
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