Corporate News

Telstra move to back out of SMC talks seen as ‘credit positive’

Posted on March 18, 2016

MOODY’S Investors Service backed Telstra Corp. Ltd.’s decision to back out of a wireless joint venture with San Miguel Corp., saying the deal would have increased the Australian telco giant’s credit risk.

“We view this action as credit positive (for Telstra). Committing to the Philippines would have involved significant execution risk and the use of Telstra’s excess capital to expand into an intensely competitive emerging market, which would have increased Telstra’s credit risk,” the debt watcher said in a March 17 note.

Telstra had said last year that it planned to invest up to $1 billion for a 40% stake in the joint venture. But on March 14, both parties announced they have stopped negotiations after failing to agree on “the right risk-reward balance.”

The Australian telco wants to expand in Asia because of shrinking margins in its domestic operations, especially on mobile services. But Moody’s believes existing players in Manila will not let go of their market share, given their history of acquiring new entrants in the past.

Moody’s pointed out that the duopoly and the strategic investors of Philippine Long Distance Telephone Co. (PLDT) and Globe Telecom, Inc. are “very strong.” Singapore Telecommunications Limited owns 47.2% of Globe, and NTT Docomo, Inc. holds 20.4% of PLDT. 

“We believe that the strategic importance of these investments will motivate Singapore Telecommunications and NTT Docomo to support efforts to preserve PLDT’s and Globe’s respective market shares if a third player were to enter the Philippines,” the note read.

“Three new entrants were eventually acquired by, or merged with Globe and PLDT after having failed to gain the necessary scale to compete successfully against the incumbents, increasing the risk of the potential venture for Telstra.”

Despite San Miguel’s possession of the valuable 700 megahertz spectrum, the planned partnership will likely be “capital intensive” and have difficulty in accessing additional infrastructure such as cell towers and fiber lines due to the absence of independent tower firms in the Philippines.

The expensive interconnection rates will also pressure Telstra to produce “adequate” margins.

“We believe that entering emerging markets with high barriers to entry increases credit risk more than the alternative of returning excess cash to shareholders via share buybacks,” Moody’s said.

Data from the debt watcher indicated Telstra returned AUD$1 billion to investors through share buybacks during the fiscal year ending June 30, 2015.

“Buybacks provide more capital and expense flexibility than assuming the ongoing obligations associated with trying to enter a duopoly market as a third operator,” Moody’s said. “Telstra is facing competition in its mobile and broadband businesses in its home market of Australia.”

The Australian company is expected to report mobile margins of about 38% over the next 12-18 months, lower than the 40% recorded in the preceding fiscal year.

For its part, San Miguel said it will penetrate the local telco industry alone, with its “high-speed” Internet service set to be launched ”in the next few months.” It said it remains “interested” to forge other partnerships, but is “not rushing.”

Hastings Holdings, Inc., a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc., has a stake in BusinessWorld through the Philippine Star Group, which it controls. -- Daphne J. Magturo