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Fitch: Indonesia Tower Sales to Benefit TBI & XL; Telkom Neutral

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Two deals announced in October by major Indonesian telcos to sell off tower assets to dedicated tower operators will have a varying credit impact for each of the deal participants, says Fitch Ratings.

Market leader PT Telkom's plan to sell 49% of subsidiary Mitratel to Tower Bersama (TBI) will be credit neutral for Telkom and positive for TBI.

XL Axiata's (Indonesia's third-largest telco) plan to sell 3,500 towers to PT Solusi Tunas Pratama (STP) will be credit positive for XL.

The all-equity deal between Telkom and TBI will add about USD125m to TBI's annual revenue and USD70m to EBITDA. TBI's FFO-adjusted net leverage will improve to around 4.0x-4.5x from 5.0x as its annualised last-quarter run-rate EBITDA will rise to USD295m from USD225m, and it will consolidate additional net debt of USD225m to its existing net debt of USD1.2bn on completion of the transaction.

TBI's tower portfolio will grow by 35% to 15,194, to emerge as Indonesia's largest independent telecoms tower company. Its operating EBITDAR margin will improve over the medium term as it adds more colocations (the renting/provision of space for other telcos' equipment) on the acquired towers - given their low tenancy ratio of 1.1x. TBI gains management control of Mitratel, and will also have the option to take 100% ownership by selling another 8% stake in TBI and paying up to USD145m over 10 years to Telkom as Mitratel achieves certain performance milestones.

The deal will have only a small dilutive effect on Telkom's profitability, due to higher annual tower rental costs. Telkom will retain a 51% stake in Mitratel, and in exchange receive a 5.7% stake in TBI.

The IDR5.6trn (USD460m) proceeds from XL's tower sales to STP will be used to partially repay debt and improve FFO-adjusted net leverage to below 3.0x from 3.5x. XL's leverage rose in 2013 when it bought Indonesia's fifth-largest telco, Axis. It will also benefit from a low fixed-lease rental of IDR10m per month per tower without any additional service fees or inflation escalator as part of the deal - significantly lower rates than the market average.

Fitch added that it does not view the XL/STP deal as setting a precedent for tower rental pricing, and should not lead to heightened price competition. In sale and lease-back transactions, low lease rental payments can be offset by larger up-front cash payments, so they do not necessarily act as pricing benchmarks for standard non-sale leasing agreements. This will also not affect existing tenancy contracts of TBI and Protelindo, which have a remaining contract life of 7.2 and 7.4 years, respectively.

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Tags: fitch ratings  xl axiata  pt telkom  tower bersama  Indonesia