(TIS) – A plan by media mogul Chairul Tanjung’s CT Corp. to buy a majority stake in PT Telekomunikasi Indonesia’s (IDX:TLKM) TelkomVision pay-TV arm is credit positive for Telkom as it would allow the state telco provider – Indonesia’s biggest by subscribers – to unlock the value of the pay-TV business, focus on its core fixed-line voice services and strengthen its mobile and fixed broadband operations, Moody’s Investors Services says in a Credit Outlook. The following is an excerpt from the report. Telkom’s partnership with CT Corp. would be credit positive From “Moody’s Credit Outlook“, 10 June, 2013 Last Wednesday, Telekomunikasi Indonesia (P.T) (Telkom, Baa1 stable) announced a strategic partnership with CT Corp. (unrated) to strengthen Telkom’s wholly owned pay TV subsidiary, TelkomVision (unrated). Although the terms of the transaction are not final, we expect Telkom to divest more than 50% of its stake in TelkomVision. Such a divestment and partnership would be credit positive for Telkom because it would enable the company to unlock value from its pay TV business, focus on its core business of providing fixed-line voice services and strengthen its fixed and mobile broadband segment. The divestment of a majority stake in TelkomVision would have a minimal effect on Telkom’s revenues and profitability because TelkomVision only contributed 0.5% of the group’s revenue in 2012. TelkomVision is Indonesia’s second-largest pay TV operator and the only company to provide subscription-based direct broadcast satellite, internet protocol television (IPTV) and cable television. However, TelkomVision is a distant second to market leader MNC Sky Vision (P.T.)’s (B2 positive), commanding just a 9% market share versus Sky Vision’s 71% share. As per the terms of the agreement, Telkom would be the infrastructure provider, which enables the company to leverage its existing infrastructure. Telkom had a net cash position of IDR1.7 trillion ($179 million) as of March 2013, facilitating investment in new technologies in order to grow TelkomVision’s business. The divestment of a majority stake in TelkomVision deviates from Telkom’s stated TIMES (telecommunications, media, edutainment and services) strategy and intention of being an integrated services provider. However, even with a minority stake, Telkom can continue to bundle TelkomVision’s pay TV services to customers and reap the benefits of the convergence play. Furthermore, given its marginal contribution, the pay TV business has not received adequate attention from Telkom thus far. Under joint ownership with CT Corp., we expect it to garner more attention, enabling it to grow at a faster pace and capture more market share. As shown in the exhibit, pay TV in Indonesia has the lowest penetration rate among Asian countries, which means there is ample growth potential, particularly considering the country’s rising middle class and robust GDP. CT Corp., owned by Indonesian billionaire Chairul Tanjung, should be well positioned to invest in TelkomVision’s content. The entry into the pay TV business also dovetails well with CT Corp.’s current free-to-air (over-the-air broadcast) TV business. We believe consummation of this partnership could be a game changer for the Indonesian pay TV industry, as it will trigger increased competition, which would be credit negative for Sky Vision. The combination of CT Corp.’s content and Telkom’s network infrastructure, along with Telkom’s ability to cross-sell bundled pay TV, fixed line and cellular service offerings to subscribers, would be a distinct advantage over Sky Vision’s single-service model. However, we do not expect a material deterioration in Sky Vision’s market position in the next 12-24 months because it will take some time for TelkomVision to grow its scale and subscriber base. But as competition intensifies, Sky Vision’s operating margins will come under increasing pressure as average revenue per user declines and both subscriber turnover rates and subscriber acquisition costs rise. Published every Monday and Thursday morning, Moody’s Credit Outlook informs our research clients of the credit implications of current events. They are available to all registered users of Moodys.com. The latest edition may be found here.