XL Axiata’s plan to sell off about 35 per cent of its towers to the country’s third-largest tower company is credit positive for XL but potentially negative for the country’s tower sector if it pushes rental rates lower and kicks off a wave of price competition.
Moody’s said yesterday the move is credit positive because XL can monetise its non-core tower assets to improve its liquidity and leverage.
XL, which is 66 per cent owned by Malaysia’s Axiata Group, announced last week plans to sell around 3,500 of its telecoms towers to infrastructure player Solusi Tunas for IDR5.6 trillion ($460 million).
The towers have been sold for cash with XL leasing them back for ten years, according to a statement. The transaction is due to close by the end of the year.
XL will use the cash to pay down its debt. Its reported debt to EBITDA peaked at 3.5x in June after its $865 million acquisition of Axis Telecom in April, Moody’s said.
A statement said: “The sale and leaseback terms are quite favourable for XL and will help to boost the company’s cash flow and future operating profits. The fixed lease rental at IDR10 million per month is significantly lower than the current market average, and there are no separate service fees or inflation escalator. Such favourable deal terms are unprecedented in the Indonesian tower sector.”
The agency said, however, the country’s two top tower companies — Profesional Telekomunikasi Indonesia (Protelindo) and Tower Bersama Infrastructure (TBI) — would face revenue pressure if the terms of the deal become a benchmark for future rental contracts. “There is no near-term risk, however, as the existing contracts are non-cancellable, non-negotiable and long-dated. The average remaining life of Protelindo’s contracts are 7.4 years and TBI’s are 7.2 years.”
The deal has the potential to increase competitive pressures as the number-three player starts to close the gap on the two leaders. It will have about 6,300 towers, compared to TBI’s 10,159 towers and Protelindo’s 10,795.
The risk over the next one to three years, Moody’s said, is that Solusi Tunas could continue to offer low rental rates on towers it builds and purchases to expand quickly and gain market share. The others would need to follow suit.
The agency noted that Protelindo’s credit metrics remain strong for its current Ba2 rating. But TBI’s negative outlook reflects its high leverage following its acquisition of 2,500 towers from Indosat.
Independent tower operators in Indonesia, like their counterparts in the US, generate adjusted EBITDA margins of more than 80 per cent. “This could theoretically improve as collocations (multiple cellular operators leasing space on one tower) accelerate and create economies of scale,” it said.
But increased price competition could push down margins and lead to operators negotiating down rental rates when their tower lease contracts are renewed.