SINGAPORE (S&P Global Ratings) Aug. 31, 2017–S&P Global Ratings said today that its rating and outlook on Malaysia-based wireless services provider Axiata Group Bhd. (BBB+/Stable/–) are not affected by the company's acquisition of tower assets from Pakistan Mobile Communications Ltd. (Jazz) for US$940 million.
We expect the tower assets to be EBITDA-accretive and neutral to our leverage expectations for Axiata in 2018 and beyond. We estimate the company's pro forma ratio of debt to EBITDA to be 1.9x in 2018, slightly better than our downgrade trigger of 2.0x. However, we believe the rating headroom remains limited with no scope for significant debt-fueled acquisitions or material
shareholder distributions.
Axiata's acquisition of 13,000 towers from Jazz establishes it as one of the leading tower companies in Pakistan. Although the acquisition increases the share of revenue from higher-risk economies for the company, we believe tower assets are a passive infrastructure play and should provide a steady stream of income. We also expect the prospects for tower companies in Pakistan to improve because telecom incumbents are increasingly looking at tower-sharing arrangements to optimize costs.
Axiata will control Tanzanite Tower Pvt. Ltd., a Pakistani tower company, through its subsidiary edotco Pakistan Pvt. Ltd., while a significant minority interest (45%) will remain with Dawood Hercules Corp. Ltd, a Pakistani-based group with interests in several businesses.
The transaction will be funded through a combination of local debt of US$600 million and equity contributions of US$174 million by edotco Group Bhd. and US$166 million by Dawood Group. In 2017, Axiata sold a minority stake in edotco Group to Innovation Network Corp. of Japan, raising US$400 million to fund the expansion of its tower business. Axiata expects the Jazz tower acquisition to close by the fourth quarter of 2017.
We believe Axiata will continue to seek opportunities to augment its tower assets, within its stated debt tolerance levels of a ratio of gross debt to EBITDA of 2.5x. However, any significant debt-fueled acquisition remains a risk to our base case.
Axiata's financial performance for the second quarter of 2017 was in line with our expectation. We believe the company's operating performance continues to show signs of stability with slight improvement, except for the Bangladesh operations, where the integration of Airtel Bangladesh Ltd. with the company and revival in profitability are taking longer than we expected. In our view, Axiata's performance will remain steady over the next 12-24 months.
