Airtel-Telenor deal is a result of Reliance Jio’s aggressive entry: Fitch

Fitch Ratings said that Airtel’s deal with Telenor to acquire the latter’s India operations is the latest sign that the entry of aggressive Reliance Jio is spurring incumbents to consolidate to meet the intense competition and weaker telcos better to exit altogether.

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Jio’s massive investment of USD20-25 billion and unique 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, Reliance Jio, the combination of Vodafone India and Idea Cellular, and the combined Reliance Communications and Aircel Limited, the agency said.

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. RCom is separately acquiring Sistema Shyam Teleservices.

“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,” the agency said.

Airtel on Thursday inked 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,” the agency said.

The agency said that Telenor’s Indian operations would also come with 45 million subscribers, who generate revenue of USD600-700 million and EBITDA of USD50-60 million. 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.

Airtel’s Indian subscriber base is 266 million that generates USD14.5 billion revenues.

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 serve rising data usage by subscribers better. The deal is subject to approval from telecom regulators, Indian courts and antitrust 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%,” the agency said.

Fitch said Bharti Airtel 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.

Also read: Airtel to buy Telenor India to augment spectrum holdings and customer base

“Bharti’s credit profile will remain unaffected by the planned acquisition of 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,” it added.

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