PIF’s offer for 51% Tower stake is credit neutral for stc

DUBAI (S&P Global Ratings) — S&P Global Ratings today said that Saudi sovereign wealth fund the Public Investment Fund’s (PIF) nonbinding offer to acquire 51% of Saudi Telecom Co.’s (stc) fully owned towers subsidiary Tawal is another demonstration of stc’s strategy to monetize its assets.

Subject to regulatory approvals, the sale of the majority stake in Tawal and subsequent deconsolidation will likely have limited immediate effects on stc’s (A-/Positive/A-2) financial metrics and business operations, based on our preliminary estimates. This is because we understand that stc is the main customer for the tower company, which carries no financial debt. Although this is stc’s first majority stake divestment of a subsidiary, the transaction follows earlier deals such as the listing of 20% of technology company stc solutions in September 2021 and the sale of a 15% stake in Saudi’s first licensed digital bank stc pay in December 2020. The company also established an internet of things (IoT) joint venture with the PIF (unrated), it’s main shareholder, earlier in 2022.

Tawal owns and operates more than 15,500 towers (4G and 5G) in Saudi Arabia and announced the acquisition of Pakistani tower company AWAL earlier this year. The subsidiary is valued at more than Saudi riyal (SAR) 21 billion ($5.8 billion), implying proceeds from a 51% stake of about SAR11 billion for stc. The PIF’s consolidation of towers infrastructure in Saudi Arabia should help optimize the deployment of 5G investments, as the country fast-tracks its digital economy development under Vision 2030.

We expect the deconsolidation to have a limited effect on stc’s consolidated financials, with Tawal treated under the equity method post transaction. We understand that Tawal generates most revenue and profits from stc, which are eliminated on consolidation. At the same time, we understand that there is no financial debt and limited cash at Tawal. We expect a moderate but not meaningful reduction in consolidated capital expenditure (capex) following the deconsolidation. This is because we estimate that 5G investments will normalize in the future, given those already undertaken (7,247 towers at Sept. 30, 2022) and stc’s focus will increasingly shift to investments in digital services. This will result in a more asset-light business. Whether stc continues to engage with Tawal under a master service agreement or moves to a sale-and-leaseback agreement, we would apply analytical adjustments to reported debt and EBITDA (under our “Corporate Methodology: Ratios And Adjustments”, published April 1, 2019, on RatingsDirect). This would increase S&P Global Ratings-adjusted debt by either the net present value of future payments (in case of a master service agreement) or additional lease liabilities (sale and leaseback) and simultaneously lead to higher EBITDA after excluding fees paid to Tawal.

Furthermore, stc’s consolidated lease liabilities (SAR3.2 billion at Sept. 30, 2022) would be reduced by the share pertaining to Tawal following the deconsolidation. Overall, we expect the effects on S&P Global Ratings-adjusted credit metrics to be minimal upon completion, after accounting for sizable disposal proceeds.

In our view, stc will likely redeploy a large portion of the sale proceeds into its operations over time to develop various noncore services. Therefore, we assume only a temporary, but not sustainable, increase in cash balances, while a significant increase in profits from nontelecom businesses will take several years to materialize. In our view, the profit contribution from nontelecom services could gradually increase to about 20% over the next three years, from an estimated 10%-15% currently. Although potential special dividend distributions are possible, this remains subjects to board approval and performance, as well as capex requirements.

Under our base case, we expect unchanged annual dividend payouts of about SAR8 billion but think that low leverage (0.4x rolling12-month S&P Global Ratings-adjusted debt to EBITDA at Sept. 30, 2022) can accommodate additional dividends, especially after receiving the same proceeds.

Our view on stc’s business risk profile is unchanged given the limited expected effect on its consolidated profitability, with a forecast EBITDA margin of 35%-37% in 2022-2023. Minimal EBITDA lost from third parties due to Tawal’s deconsolidation could be partly mitigated by dividends from Tawal, which would be captured in S&P Global Ratings-adjusted EBITDA. We consider stc a governmentrelated entity, with a strong link to the government of Saudi Arabia, which holds a 64% stake via the PIF. As a result, we view the consolidation of the towers as supportive for the overall industry, and don’t think that the lack of control over tower infrastructure will have negative consequences for stc given its solid market position. PIF has been a supportive shareholder, committed to keeping an over 50% stake.

Our ‘A-‘ rating on stc remains on a positive outlook, mirroring that on our Saudi sovereign rating. The ‘a+’ stand-alone credit profile is also unaffected by the transaction.

Related Research:

  • PIF’s 5.01% Stake Sale Does Not Change Our View Of Saudi Telecom Co.’s Government Links Or Likelihood Of Support, Dec.7, 2021

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