Fitch Ratings says that Bharti Airtel Limited's (Bharti) Long-Term Foreign-Currency Issuer Default Rating of 'BBB-' with Negative Outlook is unaffected by its acquisition of US-based chip maker Qualcomm's broadband wireless access (BWA) spectrum assets in India.
"Although Bharti's rating has limited headroom for a large debt-funded acquisition, the acquisition of a 49% stake in Qualcomm's Indian entity does not immediately burden its balance sheet," says Nitin Soni, Associate Director, Fitch's Asia-Pacific Telecom, Media and Technology team. "Only when Bharti increase its ownership of Qualcomm's BWA Indian entities to 100% by end-2014 will it then have full responsibility to service the entities' outstanding debt."
The Negative Outlook continues to reflect the adverse effect of India's uncertain regulatory environment. Fitch is monitoring regulatory decisions that may result in higher regulatory cash outflows than the agency's base case assumptions. The agency notes that a large regulatory cash outflow coupled with a much earlier-than-expected (prior to FY15) responsibility to service the additional debt at Qualcomm's BWA entities could result in a negative rating action, particularly if Fitch expects Bharti's funds from operations-adjusted net leverage to remain above 2.5x on a sustained basis (financial year ended-March 2012: 2.7x).
Bharti announced on 24 May 2012 that it acquired a 49% stake in Qualcomm Asia Pacific's Indian BWA entities for an upfront cash consideration of USD165m (INR9.1bn). Of this USD75m will firstly be used to acquire a 26% equity interest in Qualcomm's BWA entity that is currently equally held by Global Holding Corporation Private Limited - parent company of GTL Infrastructure Limited (Fitch 'C(ind))' - and Tulip Telecom Limited (Tulip, 'Fitch A+(ind)'/Negative). The balance subscription of USD90m will be used to acquire fresh equity in these entities. This will give Bharti a right to use Qualcomm's spectrum assets in Delhi, Mumbai, Haryana and Kerala.
Post the Qualcomm transaction, Bharti would have access to 3G/BWA spectrum in 18 of India's 22 telecom circles. Fitch believes that BWA will contribute minimal revenue to Bharti in the next two years as the 4G infrastructure is still developing. However, data penetration is likely to grow significantly in India during the next decade due to growing data demand, increasing affordability of 3G tariffs and handsets, as well as growing mobile application content.
Qualcomm acquired its Indian BWA licence in a keenly contested auction held in June 2010 in four Indian states for about USD1bn. The company managed to get a licence only in March 2012 to provide internet services after an 18-months wait due to regulatory delays. Bharti also won four licences in the same auction in different areas - Maharashtra, Karnataka, Kolkata and Punjab.
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