Moody’s: Tower Deal is Credit Positive for Indosat and Both Acquirers

Tower Deal is Credit Positive for PT Indosat Tbk (IDX: ISAT) and Both Acquirers - Photo by the Company

JAKARTA (TheInsiderStories) – On Oct. 15, PT Indosat Tbk (IDX: ISAT) (Baa3 negative), had entered into a sale and purchase agreement to sell and lease back 3,100 of its towers, 36 percent of its total towers, for Rp6.4 trillion ($453.90 million). The completion of the transaction its expecting before the end of 2019, said the companies.

PT Dayamitra Telekomunikasi (Mitratel), PT Telkom Indonesia Tbk (IDX: TLKM, Baa1 stable), wholly-owned subsidiary, bought 2,100 towers for Rp4.4 trillion. While, PT Profesional Telekomunikasi Indonesia (Protelindo, Baa3 stable) acquired 1,000 towers for Rp1.95 trillion.

The towers have a tenancy ratio of 1.9x, which is higher than the tenancy ratios of 1.6x-1.7x for the leading independent tower companies in Indonesia. The transaction is likely to conclude by year-end 2019.

The transaction is credit positive for all three companies. Indosat‘ liquidity will get a boost from the sale of non-core tower assets. The $454 million proceeds will materially increase the operator’ cash balance and help support its aggressive capital spending plans over the next 12 months.

In addition, the sale reflects Indosat’ commitment to managing its debt levels through the sale of non-core assets. For Protelindo, the transaction cements the company’ leading market position in the Indonesian tower space, while its financial profile will remain in line with our expectations.

Mitratel will also increase its tower assets to around 15,800 following this transaction. While the transaction is mostly debt-funded, the leverage for its parent Telkom remains in line with our expectations.

Indosat has significantly increased its capital expenditure plans to Rp30 trillion for 2019 – 2021, to catch up with peers on 4G network and coverage outside of Java.

While the accelerated investment is key to the unit of Qatar’ Ooredoo QSC strategy to remain competitive, it has resulted in the company’ credit metrics weakening amid an intensely competitive operating environment for the Indonesian mobile sector.

The asset sale is credit positive for Indosat’ liquidity but the sale and leaseback transaction structure will not materially benefit the company’ leverage because we apply standard adjustments of capitalizing operating leases, which is added back to the debt amount.

The telco firm, will remain the anchor tenant on the towers, with a lease-back rate of Rp10 million per month for 10 years with a renewal option, part of which will be subject to an annual inflation escalator. We estimate that the operator’ leverage will be around 3.0x-3.2x over the next 12-18 months.

“We expect high leverage and negative free cash flow over the next 12-18 months. A continued improvement in the operator’ operating fundamentals, with the company recouping its market share and profitability margins, would be essential for the rating outlook to return to stable,” said Moody’s in a written statement today.

The analysts also expect Indosat could sell a further as much as 3,000 of its towers to fund the capital expenditure,which will help to partially fund its continued high spending.

Tower sales by telco players continue to increase the proportion of ownership by independent tower companies in Indonesia. The country has about 100,000 towers, of which 76 percent are owned by independent tower companies. Independents owned only 55 percent of towers in 2017.

The additional 1,000 towers and 1,900 tenancies will help Protelindo maintain its position as the leading tower company in Indonesia with 20,152 towers and 32,000 tenants. Its tenancy ratio will remain unchanged at 1.6x.

Moody’s stated, “We expect Protelindo to fund the acquisition with bank debt, which will increase its adjusted debt/EBITDA to about 3.0x-3.1x in 2019, before reducing to about 2.8x in 2020 given the EBITDA-accretive nature of the tower business.”

The top four providers in Indonesia form the majority of the tenants on the acquired Indosat towers. This will keep the quality of Protelindo’s tenancies unchanged, with 94 percent of tenancies from the top four players, namely Indosat, PT XL Axiata Tbk (IDX: EXCL, Baa3 stable), PT Telekomunikasi Selular (Baa1 stable) and H3i (the Indonesian subsidiary of Hutchison (Baa1 stable)).

Following the acquisition, Mitratel’ tower coverage in Central Java will increase, in line with Telkom’ strategy to improve its tower subsidiary’s scale and operating performance. Mitratel had earlier in March 2019 acquired PT Persada Sokka Tama, a telecommunication tower company in Indonesia, which owns 1,017 towers across the country.

“We expect Mitratel to part finance this acquisition through rupiah bank debt, this transaction can be well accommodated in Telkom’ credit profile, given its strong operating and financial profile and the EBITDA-accretive nature of its tower business. We expect a negligible impact on leverage, which will remain at 1.2x following the transaction,” said the agency.

Recently, Mitratel has been focused on inorganic growth through tower acquisitions. Given the combined tower portfolio of Telkom, Telkomsel and Mitratel account for 35 percent of Indonesia’s total towers, any change in the state-owned telco company’ strategy for its tower business would substantially change the competitive landscape for the industry.

US$1: Rp14,100

Written by Staff Editor, Email: theinsiderstories@gmail.com