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Sept 27 (The following statement was released by the rating agency)
Fitch Ratings says that PT XL Axiata's (BBB/Stable) ratings will be unaffected by a proposed debt-funded acquisition of a 95% stake in PT Axis Telecom (Axis), Indonesia's fifth-largest telecommunications company by revenue.
Fitch believes that the benefits of the acquisition, at an enterprise value of USD865m, more than offset the additional debt burden.
If XL completes the acquisition, its revenue market share will increase to 22% (currently 19%), improving its narrow lead over second-placed PT Indosat Tbk (BBB/Stable) with 18%. XL will gain access to 15MHz in the 1800MHz spectrum and 10MHz in the 2100MHz spectrum, 14 million additional subscribers generating annual revenue of USD260m, capital and operating expenditure savings of about USD800m and 1,600 telecom towers.
The acquisition will fill the spectrum gap for XL, which had the lowest amount of spectrum among the top three operators. Acquiring the Axis stake would put XL's total spectrum assets on par with Indosat's 55Mhz and just short of the market leader PT Telekomunikasi Indonesian Tbk's (BBB-/Stable) 60MHz. Moreover, XL will get access to the 1800MHz spectrum, which is most suitable for the fast-growing data services segment.
According to XL, debt/EBITDA will increase by less than 2x (end-June 2013: 1.9x) and post-transaction the company will have a strong deleveraging profile. XL plans to fund the acquisition partly through a shareholder loan from its 66.5% parent Axiata Group Berhad (Axiata), with external loans making up the balance. Fitch believes that XL's annual EBITDA of about USD850m-900m would slightly decrease on consolidation of Axis's EBITDA losses.
Fitch rates XL on a "top-down basis" according to its Parent and Subsidiary rating criteria dated 5 August 2013. XL's ratings of 'BBB' are closely aligned with its parent Axiata given its strategic and financial importance to the latter. Axiata's commitment to a shareholder loan for the proposed acquisition demonstrates the strong links between XL and its parent.
The transaction is subject to regulatory and shareholders' approval and is expected to be completed by March 2014.
Fitch anticipates that the Indonesian telco industry will consolidate further, which could see a decrease in the number of operators to four or five in the medium term, from the more than 10 now. The smallest six operators, which have EBITDA losses and struggle to gain any meaningful market share, could seek M&A to strengthen their market positions. Also, CDMA operators could consolidate to try to offset the effect of subscriber losses as the tariff differential between them and GSM operators narrows.