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Fitch: No Immediate Rating Impact on SK Telecom from CJ Hellovision Purchase

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Fitch Ratings says SK Telecom's proposed acquisition of a stake in CJ HelloVision (CJH), the largest cable television operator in South Korea, will have no immediate rating effect on SKT or SK Broadband.

The acquisition is likely to boost SKT's media business by broadening its subscriber base and strengthening its bundled services sales. SKT will merge CJH with SKB, its wholly owned fixed-line subsidiary, after the acquisition of an initial 30% in CJH.

The acquisition of CJH will create synergies immediately by expanding SKT's pay-TV subscriber base, therefore improving content sourcing power and economies of scale. SKT's pay-TV market share will increase to around 27% with 7.3 million subscribers compared with market leader KT Corporation's (A-/Stable) 30% share with 8.5 million subscribers. Sales of bundled services across wireless, pay TV, and broadband are likely to increase as SKT will have easy access to CJH's existing customers.

CJH is also the leading mobile virtual network operator (MVNO) in terms of subscribers; and the addition of CJH will bring SKT's wireless telecommunications market share back to over 50% from the current 49.6%. However, network integration might prove challenging and take time as CJH and SKB use different types of networks.

The transaction will cost SKT about KRW1trn. SKT will initially pay KRW500bn for a 30% stake in CJH currently held by CJ O Shopping, and is likely to acquire CJ O Shopping's remaining 23.9% stakes in CJH at a later date through call and put options. SKT plans to merge CJH and SKB via a stock swap following the acquisition of the initial 30% stake, which is subject to regulatory approval.

SK Telecom will eventually own 75.3% of the combined entity once the merger is completed by April 2016. This is in line with Fitch's view of the strategic importance of SKB's fixed-line as well as media businesses to SKT.

Fitch does not expect the transaction to have significant impact on SKT's financial profile because of its strong operating cash generation ability. We expect the acquisition to increase FFO-adjusted net leverage ratio to 1.4x-1.5x (2014: 1.35x), which is still below 1.75x, the level at which we would consider negative rating action. However, the rating headroom will narrow after the transaction.

SKT also reported relatively weak 3Q15 operating results with revenue and operating profit down by 2.4% yoy and 8.6% yoy respectively. The operator attributed the decline to regulated cuts in interconnection fees and an increase in the number mobile subscribers receiving discounts on their contracts, which resulted in lower-than-expected ARPU growth. EBIT margin also declined to 11.5% in 3Q15 compared with 12.3% in 3Q14.

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