Fitch: Telco deal offers 4G, 5G potential

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Debt watcher Fitch Ratings on Tuesday said that the acquisition of San Miguel Corp.’s telecommunications assets by Philippine Long Distance Telephone Co. and Globe removes the threat of heightened competition in the sector, but has the potential to improve data services in what is still predominantly a 2G mobile market.

Fitch said the mega buyout deal would provide PLDT and Globe with access to the efficient 700MHz broadcast spectrum, which can be used for improved 3G, 4G and potential 5G service.

Both PLDT and Globe Telecom earlier announced that they will each acquire 50 percent of SMC’s telecom subsidiary for a total enterprise value of P70 billion, including assumed debt of P17 billion.

PLDT and Globe Telecom plan to jointly manage SMC’s telecom subsidiaries.


Higher leverage

The credit rating agency said that the deal would result in a temporary increase in leverage for both operators due to financing the acquisition itself, as well as follow-on developments and projects.

“We believe the two incumbents moderate ratings headroom will come down following the acquisition,” Fitch said, but stressed that their leverage would likely not increase to dangerous levels.

PLDT plans to partly fund this acquisition through the sale of its 25 percent stake in Meralco, an electricity distribution company, for P26.2 billion.

“We believe that post-acquisition, PLDT’s FFO-adjusted net leverage will worsen by only 0.1x-0.2x to 2.6x-2.7x – still below the 3.0x at which Fitch may consider negative rating action on its Local-Currency Issuer Default Rating,” the company said.

On Monday, PLDT chief executive officer Manuel V. Pangilinan said the company made the first payment of P52.85 billion or 50 percent of the equity payment price. The second payment of 25 percent will be due on December 1, and the remaining 25 percent on May 30, 2017.

For Globe Telecom, assuming it will fund the entire consideration through debt, its FFO-adjusted net leverage will deteriorate to 3.0x, still within our negative rating threshold of 3.5x for its ratings.

Aggressive investment

“We believe that the incumbents’ business profiles will strengthen with the acquisition, which removes the challenge from SMC to the duopoly market structure,” Fitch said, noting that Globe Telecom could reap more benefits as it has greater exposure to the mobile sector, which accounts for 76 percent of its revenue.

By comparison, PLDT’s wireless business contributes 63 percent of its revenue.

Fitch expressed belief that both PLDT and Globe will invest aggressively to expand their data services, now that they will have access to the coveted 700MHz spectrum, which is able to penetrate walls and is useful to provide in-building coverage.

In 2016, PLDT and Globe are likely to have capex of about $1billion and $850 million, respectively, which are the highest amounts in the last five years for both companies.

The Philippine mobile market is highly saturated, but most users are on 2G networks – which provide telcos with plenty opportunities if they offer faster 4G LTE services.

Third player entry difficult

The credit ratings firm said that SMC’s exit reflects the significant investment required to roll out network infrastructure to compete with the incumbents, especially given that PLDT and Globe would be reluctant to share their tower and associated infrastructure with the new entrant.

SMC held the coveted 700MHz but failed to roll out a network; and in March Telstra—Australia’s largest telco—exited a joint venture that SMC planned to use to develop its telecom business.

As part of the acquisition, SMC’s telecom subsidiary will have to return part of its spectrum back to the government, which could result in a fresh government auction that would allow the entry of a new competitor.

The unused spectrum assets covers a complete set of 2G, 3G, 4G and potential 5G frequencies.

The 700 MHz band, located above the TV broadcast channels, penetrates buildings and walls and covers larger areas. Mobile service providers in other countries have been using the spectrum to offer mobile broadband services.

Aside from 700 MHz, San Miguel Group owns spectrum under the 900 MHz, 800 MHz and 1,800 MHz.

PLDT Group holds frequencies in the 800 MHz, 900 MHz and 2,100 MHz bands while Globe owns frequency in the 900 MHz, 1,800 MHz and 2,100 MHz bands.

PLDT and Globe earlier asked the National Telecommunications Commission to reassign the 700 MHz to other existing telecom players. Utilizing the 700 MHz would allow the deployment of a high-capacity LTE-based wireless and fixed-broadband network to deliver higher data rate and LTE broadband service.

San Miguel president Ramon Ang earlier turned down the request of Globe and PLDT to share some of its 700 MHz, as it had planned to offer its own mobile broadband this year.

San Miguel and Australia’s Telstra Corp, however, ended talks on a $1-billion joint venture to offer wireless services in the country after they failed to agree on terms.

On Monday, the NTC approved the use by Smart Communications, Inc. of certain radio frequencies in the 700MHz, 900MHz, 1800MHz, 2300MHz, and 2500MHz bands.

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