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PLDT (TEL) sells Smart Towers as it addresses triple threat

It was reported that DMC Urban Property Developers, Inc.’s acquisition of PLDT’s (TEL) Smart Towers office building and the land they are built on has been approved by the Philippine Competition Commission.

The sale is amidst the threats TEL is facing. TEL is facing a triple threat – of elevated capital expenditure requirements, elevated debt level, and of sustaining cash dividends.

No less than the President on his State of the Nation Address has called on TEL to improved its services. Aside from that, competition pressures from surging telecom players like DITO, Converge ICT, and Now Corporation, is building. To keep competition at bay, TEL has to invest significantly on its network and infrastructure. TEL has to fund these investments. Investments in infrastructure can be funded from internally generated cash from operations but it will consume the cash generated from operations.

If cash from operations will be burned by the capital expenditures for network and infrastructure investments, how will TEL fund the cash dividends? Through debts?

We have earlier commented that TEL debt level has risen significantly. As of June 30, 2020 (1H 2020) total long-term debt of TEL is at 199.7 Billion Pessos. That is a significant 28.2% increase from 155.8 Billion Pesos as of the end of December 31, 2018. Further borrowings to fund the dividend will increase the risk that those debts become unsustainable.

To sustain the dividend, TEL will have to cut capital expenditures for network and infrastructure improvements risking the ire of the President and its customers. Plus, this will give the competition the momentum to eat TEL’s market share as TEL’s services lag because of the underinvestment. Market erosion erodes revenue base.

If cash from operations will be divided between capital expenditures and dividend distribution, how will TEL pare down debt? Borrow money to pay borrowed money? How long could that set up last?

The asset disposals of TEL tell something. TEL needs funds and there are not a lot of assets that can be disposed of right now. What’s left is the busted tech investment in Rocket Internet and the media PDRs.

Disclaimer: This is an independent analysis for discussion purposes with the aim of giving stock traders and investors an independent perspective.  Accuretti Systems Inc. in the course of day to day trading may have own, or is considering buying or disposing, the shares of the companies mentioned in this commentary.

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