The announcement.    Tata Teleservices (TTSL) and Tata Teleservices Maharashtra’s (TTML) mobilebusinesses will merger into Bharti on a debt free & cash free basis. Bharti willonly acquire a “small” portion of the unpaid spectrum, but will get over 40million customers and Tata’s spectrum and fiber assets. Revenue and EBITDAof the target assets haven’t been disclosed and TTSL’s segmental accountsdon’t break down the mobile business separately. TTSL & TTML’s overallEBITDA was INR13.4 billion and INR7.1 billion respectively in FY17. It seemsthe transaction has been structured like some of Bharti’s past acquisitions,with access to assets & subscribers in return for some of the spectrum liability.    Small credit positive.    Despite lack of complete clarity, we see the deal as potentially a small creditpositive for Bharti. It will increase subscriber & revenue market share, and giveaccess to Tata’s spectrum and fiber assets. More importantly, this dealremoves another weaker player in the sector as we go through the final phaseof consolidation. Per Business Standard, the subscriber, revenue and spectrummarket share of the combined entity will increase to 27-28%, 40% and 28%respectively, and Bharti will assume INR15-20 billion in spectrum liabilities.    Tata’s margins will in all likelihood be lower than Bharti, but we think that canbe scaled up with better efficiencies. We note that past acquisitions likeTelenor India have been viewed favorably by the rating agencies.    Other recent developments.    Economic Times reported earlier this week that Bharti Infratel may acquirebalance stake in Indus Towers and then a consortium of PE players will acquire40-45% stake in Infratel. We wouldn’t write much on this, given no officialannouncements, albeit just note that any sale of stake in Infratel by Bharti willbe credit positive. Separately, Bharti has partnered with a local handsetmanufacturer (Karbonn Mobiles) to compete Rjio’s feature phone offer, whichwe again see as a marginal positive – please see the note from our equitycolleagues for more details on this. Focus now shifts to 2Q results, whichshould be released towards the end of this month.    Maintain Buy on the 2024s.    We have had a Buy on the 2023s & 2024s since early May when they weretrading around G+200bp. We then downgraded the 2025s to Sell on Sep 21,purely on valuation grounds as they were trading tighter than the 2023s &2024s. This anomaly has now corrected, with the 2025s (G+175bp) tradingwider than the 2023s (G+170bp). Hence, we upgrade them to Hold, while alsodowngrading the 2023s to Hold. Maintain Buy on the 2024s (G+185bp) thatare cheapest on the curve. We retain our view that Bharti should stay an IGcredit, in which case we see the fair value for 2024s around 150bp. Key upsiderisks are competitive pressures easing faster than expected, while downsiderisks include a downgrade to HY, debt funded acquisitions / mergers, etc.

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