THE aborted partnership between San Miguel Corp. (SMC) and Australian telecom provider Telstra will delay the entry of a third player in the duopolistic local telco industry, and will give a short-term boost to the credit standing of Philippine Long Distance Co. (PLDT) and Globe Telecom (Globe), Fitch Ratings Inc. said.
On Monday SMC and Telstra announced that negotiations on a potential partnership deal estimated to be worth $1 billion have been terminated after the two parties failed to reach a favorable agreement.
Ratings agency Fitch said that for the short term, the withdrawal of the deal is beneficial for the two major players in the Philippine telco industry—Globe (rated BBB-/Stable by Fitch) and PLDT (BBB/Stable)—as that supports their credit strengths.
Competition threat remains
However, Fitch added, “The medium- to long-term threat of greater competition remains as SMC said it will still proceed with its own network rollout as scheduled, and will consider other joint venture opportunities in the future.”
SMC owns the 700MHz spectrum frequency, coveted by the incumbents for its cost-efficiency due to wider coverage and in-building penetration than the higher frequency bands.
PLDT and Globe have requested that the National Telecommunications Commission “equitably” redistribute these frequencies among the telcos in support of a more cost-efficient rollout of 4G services.
Fitch Ratings said it believes that Telstra’s technology expertise and financial muscle would have been very valuable to the SMC joint venture.
The ratings agency said it still expects the two established telcos to invest in greater capacity this year, with industry capital expenditure to stay high at about P80 billion in 2016.
Of the two incumbents, Globe has a larger exposure to the mobile sector – accounting for 76 percent of its revenue – after further growth in the post-paid segment. By comparison, PLDT’s wireless business contributes 63 percent of its revenue, while its fixed-line business accounts for the rest.
The Philippines’ mobile market is predominantly 2G, despite its high mobile saturation.
“We believe there are strong value propositions for faster 4G LTE services, and the entry of SMC would have a greater impact on industry profitability over the longer term,” Fitch Ratings said.
Delayed entry of 3rd player
Lexter Azurin, head of Equity Research Group at Unicapital Securities Inc., agreed with the view that the aborted deal would be beneficial to Globe and PLDT.
“It’s definitely positive for PLDT and Globe as it delays the entry of a third player in the industry,” Azurin said.
Azurin said that as for SMC, moving ahead with its plan to develop a third telecom provider will be a bit of a challenge, since the conglomerate would still need to raise financing capital, a problem that would have largely been solved had the Telstra deal pushed through.
“For SMC, it’s negative since if they still pursue entry into the telco industry they would need to finance their expansion on their own. Funding the expansion may force them to raise capital in the market,” he said.
According to Azurin the telco industry will continue to face a challenging year regardless of Telstra’s entry or absence, echoing the point of view of the ratings giant.