Fitch Ratings has placed India-based Essar Telecom Infrastructure Private Limited's (ETIPL) National Long-term rating of 'BBB+(ind)' on Rating Watch Positive (RWP). The agency has also placed ETIPL's INR200m cash credit facility rated 'BBB+(ind)'/'F2+(ind)', and the Short-term rating of its INR470m bank guarantees rated 'F2+(ind)' on RWP. In addition to the existing facilities, the agency has also assigned rating of 'BBB+(ind)' to ETIPL's term loan sanctions of INR8,050m and simultaneously placed the rating on RWP.
The ratings change follows ETIPL's disclosure to Fitch that its sponsor, Essar group, has proposed to sell off their 100% shareholding in the company to American Tower Corp. AMT's indirectly held but wholly-owned Indian subsidiary, Transcend Infrastructure, has entered into a definitive stock purchase agreement to acquire all of the issued and outstanding shares of ETIPL. The RWP reflects the possibility of a potential upgrade of ETIPL's ratings following the completion of the acquisition.
Fitch expects to resolve the RWP as soon as the acquisition is completed, which is expected by end of the second quarter of 2010. Fitch would need to evaluate the linkages between ETIPL and AMT in accordance with its parent-subsidiary linkage criteria, which entails an understanding of how the new legal, strategic and operational linkages will benefit ETIPL's rating, as compared to its current ratings. The RWP indicates that there is a heightened probability of a rating change and the likely positive direction of such a change.
ETIPL currently owns and operates approximately 4,250 wireless communications sites in India with a approximately 1.8 tenants per tower. As a result of this acquisition, AMT's wireless communications site portfolio in India will increase to approximately 7,000 sites from the present 3,000 sites.
The total consideration for the acquisition is estimated to be approximately USD430m, and it is subject to certain post closing adjustments. After the acquisition, AMT will assume ETIPL's net debt and other liabilities at closing. AMT expects to use its senior unsecured revolving credit facility to satisfy the cash requirements needed for the acquisition. The acquisition is subject to certain conditions, including the receipt of regulatory approvals and other customary closing conditions.
At the acquisition price of USD430m for the 4,250 sties owned by ETIPL, the cost for each EV/Tower will equate to around USD100k. The approximate cost for building towers in India is currently about USD50k; however, the agency believes that the premium is based on the towers' relatively high tenancy of 1.8, which is amongst highest in the industry. (for details on ETIPL, please refer to the rating action commentary, "Fitch Assigns 'BBB+(ind)/F2+(ind) to Essar Telecom's Bank Loan Facilities " dated 4 September 2009 available on www.fitchratings.com)
From AMT's point of view, although the acquisition of ETIPL is sizeable, it is consistent with Fitch's expectation regarding the use of its free cash flows. In line with AMT's current ratings, Fitch believes that some cushion to make further acquisitions remains for AMT in the near-term, even though the capacity would be limited, following the completion of the ETIPL deal. The effect of future acquisitions on AMT's credit profile will depend on the size, timing and financing of such acquisitions. Over time, Fitch expects AMT's continued EBITDA and cash flow growth will provide ample flexibility for the company to reinvest in the tower business (for details on AMT, please refer to the rating action commentary, "Fitch Rates American Tower's Proposed $400MM Debt Offering 'BBB-'; Outlook Stable", dated 13 October 2009 available on www.fitchratings.com.)
For the nine months ended 31 December 2009, the revenues of ETIPL were INR1,701.8m with an EBITDA margin of 60.5%, and the interest cover of the company remained comfortable at 1.8x. For AMT total revenues increased 8.2% from last year to USD1,724.1m, and its adjusted EBITDA increased 8.1% to USD1,180.9m for the year ended 31 December 2009. During the same period, AMT's adjusted EBITDA margin was 68%, its operating income was USD672.3m, and its net income was USD246.6m. Its recurring free cash flow increased 20.5% to USD811.6m at end-December 2009.
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