Bharti Airtel-Telenor acquisition: Is it a fair deal?

A day after Bharti Airtel announced its acquisition with Telenor India, Moody's said although it is a non-cash deal and Bharti will take over outstanding spectrum payments and other operational contracts, including tower leases, the rating agency do not expect it will have a material impact on the company's consolidated leverage. 

Though, the deal will still be credit positive, but, any unexpected adverse regulatory developments in any of Bharti's key markets will be negative for the rating.

On Thursday, Bharti Airtel announced that it has entered into a definitive agreement with Telenor South Asia Investments Pte Ltd (“Telenor”) to acquire Telenor (India) Communications Private Limited (“Telenor India”).

According to the agreement, Airtel and Telenor India will merge and Airtel will take over Telenor India as soon as all necessary approvals are received. As part of the agreement, Airtel will take over outstanding spectrum payments and other operational contracts, including tower lease.

Post the deal, Airtel's mobile services subscriber base in India will increase by approximately 44 million to 310 million to give around 26% total customer market share, while Bharti's revenues would increase around 5% for the 12 months ended 31 December 2016.

Annalisa Di Chiara, a Moody's Vice President and Senior Credit Officer, in a report said, "Bharti's adjusted consolidated debt/EBITDA (including deferred spectrum liabilities) was 3.3x as of December 2016. We would seek evidence of this trend with consolidated debt/EBITDA remaining at or above 3.25x; consolidated retained cash flow to adjusted debt remaining below 20%; or adjusted EBITDA margins falling below 35%. Furthermore, any unexpected adverse regulatory developments in any of Bharti's key markets will also be negative for the rating."

The mobile market in India remained intensively competitve with the launch of Reliance Jio in September last year. Jio has been all services free of charge  in its temporary promotional entry proposition. However, it had announced its tariff plan beginning from April 1, 2017.

DiChiara, said that although Jio's recent accouncement of tariff plans will  improve industry-wide average revenue per user over the longer term, she still expect intense price competition to persist over the next few quarters, as incumbents such as Bharti, Vodafone India (unrated) and Idea Cellular respond in efforts to protect their subscriber market shares.

Thus, Bharti's profitability will remain under pressure till then. The cash proceeds from monetization activities -- including divestments in subsidiaries such as Bharti Infratel-- will help reduce debt on an absolute and relative basis, such that adjusted debt/EBITDA trends towards 3.0x by June 2017, providing cushion to absorb shocks in profitability, the report said.

"We would also view negatively any event risk associated with a sizeable debt financed acquisition or other corporate activity that negatively impacts the company's existing or targeted leverage ratios," DiChiara added.