S&P retains Bharti Airtel's rating after proposed MTN deal
Global rating agency Standard & Poor's on Tuesday retained credit rating of Bharti Airtel after the proposed over 20 billion dollar deal with South African telecom major MTN as the combined entity would benefit from economies of scale.
S&P retained the rating at BBB-, three notches down from the highest grade, and kept the outlook on the rating at stable grade, which means that ratings are not prone to be revised downwards in future.
"This rating affirmation follows Bharti's May 25, 2009 announcement of renewed efforts for a significant partnership with South Africa-based telecommunications group MTN Group Limited (not rated), which operates across various countries in Africa and the Middle East," said S&P credit analyst Suzanne Smith.
In over 20 billion dollar deal, the South African firm MTN may acquire about 36 per cent stake in Bharti and the Indian telecom major may acquire 49 per cent in the South African player. Ultimately, both companies may merge.
The combined company is expected to benefit from economies of scale as it would become a leading emerging market telecom operator, the rating agency said.
Bharti would also benefit from MTN's operating experience in 3G and number portability, which is expected to be soon introduced in India.
Similarly, MTN would benefit from Bharti's experience of growing market share and maintaining operating margins in a highly competitive environment.
The transaction is expected to face limited integration risk as the two companies have almost no overlapping operations and would continue to operate under their respective managements.
Nevertheless, after the proposed partnership with MTN, Bharti would face higher country risk, as only about 25 per cent of MTN's 2008 EBITDA came from South Africa.
MTN's other operations include Nigeria accounting for more than 40 per cent of MTN's 2008 EBITDA, Ghana, Syria, and Iran.
However, this is partly offset by the telecom industry's relatively higher stability and resistance to economic cycles and macroeconomic pressures.
"We expect the proposed transaction in its current form to result in an increase in debt for the combined entity compared with Bharti's current low leverage levels, but within our tolerance levels," said Smith.
The rating or outlook could come under pressure if there is a change in the proposed structure of the transaction resulting in weaker financial metrics.
On the other hand, the rating could be raised or the outlook revised to positive if the company strengthens its leading market position while maintaining strong financial metrics.