LONDON/MOSCOW (Fitch Ratings) — Fitch Ratings says it sees a strong strategic rationale for a merger between Kazakhtelecom JSC (“BB+/Stable”) and Kcell JSC (“BB/Stable”) following regulatory approval for the fixed-line incumbent with 51%/49% economic/voting interest in a mobile JV with Tele2 to acquire a 75% stake in mobile-only operator Kcell. If successful, the acquisition of Kcell will enhance Kazakhtelecom’s business profile, strengthening its fixed-mobile convergent service capabilities and making it a mobile leader.

Fitch does not view the remedies package associated with the regulatory approval as onerous for Kazakhtelecom. The remedies are aimed at mitigating the negative impact the merger may have on telecoms services pricing. Among others, these remedies limit Kazakhtelecom’s ability to increase tariffs in the three years after acquiring Kcell. The impact of these remedies should be offset by potential cost synergies from the transaction. Kcell heavily relies on Kazakhtelecom for using its backbone network. A merger could reduce the substantial repricing risk Kcell faces from leasing network capacity from Kazakhtelecom.

The remedies package also includes clauses to promote investments, such as expanding 4G coverage in rural areas and introduction of the 5G standard by end-2021, which will fit in with the company’s current strategic plans, albeit in a somewhat accelerated manner. Kazakhtelecom and Kcell will also have to maintain separate management structures.

Fitch expects the potential transaction to be accommodated within Kazakhtelecom’s current rating of BB+. Generally, a post-transaction spike in leverage above the downgrade trigger can be tolerated provided the company maintains its deleveraging capacity thereafter.

The potential acquisition could have an impact on Kcell’s ratings. Under Fitch’s parent-subsidiary linkage methodology, a subsidiary’s rating may be equalised with the parent’s if there are strong operational, strategic and legal ties between the two entities. This will depend on the extent of integration between the two entities once the transaction closes.