Fitch: Sri Lankan Telco Merger to Relieve Competitive Pressure
The merger between Hutchison Telecommunications Lanka (Private) Ltd and Etisalat Lanka (Private) Ltd is likely to relieve some competitive pressures that have undermined Sri Lankan telecom companies’ revenue and EBITDA growth in recent years, says Fitch Ratings.
However, the merger is unlikely to affect the ratings on market leaders Sri Lanka Telecom PLC (SLT) and Dialog Axiata PLC. This is because SLT’s ‘B+’ Long-Term Issuer Default Rating will continue to remain constrained by the Sri Lanka sovereign rating, while the ‘AAA(lka)’ National Long-Term Ratings on SLT and Dialog are at the highest level of the scale.
The long-overdue industry consolidation, announced on 26 April 2018, is likely to provide some relief from pricing pressure, especially in the data segment, where telcos have not been able to fully capture the strong growth in data traffic. However, Dialog and SLT’s free cash flows will continue to be negative, despite potential of larger cash generation, because they need to invest to expand their fibre networks and infrastructure to address fast-growing data demand. We expect the merged Hutchison-Etisalat entity to also accelerate its 4G capex investment to strengthen its network position to catch up with Dialog and SLT.
The Hutch-Etisalat merger will create the third-largest telco and reduce the number of participants in the mobile market to four from five. The merged entity will rank behind Dialog and SLT in the mobile market and ahead of Bharti Airtel Limited’s (BBB-/Stable) Sri Lankan subsidiary, Airtel Lanka. The combined entity will benefit from greater revenue share of around 10%-12% in the mobile market, below the 24% of second-ranking SLT. It will boost its spectrum portfolio to 50MHz, higher than Dialog’s mobile spectrum portfolio of 47.5MHz but the same as SLT. Importantly, it will have 15MHz of spectrum in the cost-efficient 900MHz band, compared with 7.5MHz each for SLT and Dialog, which it will likely use to roll out 4G networks.
We do not foresee the Hutchison-Etisalat merged entity threatening more price competition or taking significant market share from Dialog and SLT in the short to medium term as they each have struggled to make meaningful EBITDA profits and have high capex requirements. Both Dialog and SLT benefit from entrenched market positions, backed by solid network positions and established customer bases. Hutchison-Etisalat may lose some market share in the process of integrating their operations, as it is natural in when such large telcos combine. The merger requires regulatory approval and is expected to complete in 2H18.
Sri Lanka’s telco industry is characterised by intense competition, with mobile operators fighting for a share of the relatively small addressable population of 21 million people. Smaller telcos have struggled to gain meaningful market share as a regulatory-mandated tariff floor on voice at LKR1.5 per minute provides them with little flexibility to compete in the voice segment. Further, telcos have faced frequent bouts of tax increases, which have hastened the industry consolidation.