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Share swap positive for GMM: Fitch

Fitch Ratings (Thailand) has revised the rating outlook for GMM Grammy from "stable" to "positive" after the company's share swap with CTH.

"The 'positive' outlook reflects GMM's lower exposure to execution risk of the pay-TV business following the transaction and an improved financial profile, once the pay-TV business is deconsolidated," the rating agency said.

The offloading of GMM's loss-making pay-TV business is positive to its credit profile, Fitch added.

GMM's pay-TV business will be integrated with CTH's pay-TV operation, in which GMM will own 10 per cent. The transaction will result in the deconsolidation of pay-TV operations from GMM's financial statements. Fitch noted that the transaction would reduce GMM's exposure to execution risks in the pay-TV business, and allow the company to focus financial and management resources on its new digital-TV business.

It expects GMM's earnings and cash flow to improve in 2015 on a reduction in pay-TV-related costs, including the cash operating cost (Bt700 million to Bt800 million) and capital expenditure for content acquisition (Bt600 million to Bt1 billion). This will be more than enough to offset forgone subscription revenue worth Bt1 billion to Bt1.2 billion, it said.

It foresees that digital TV is likely to be a key growth driver for GMM in the medium term. The company launched digital TV channels in May after it won a bid for two licences last December.

The company aims to move most of its content from satellite TV channels to the new digital TV platform, while gradually adding new programmes to the digital channels to be in line with the expected advertising revenue growth.

The likely higher advertising rates for digital free TV thanks to wider viewer coverage than that of satellite TV should boost the group's revenue in the medium term, Fitch believes. However, the size and presence of a number of new operators in the digital-TV market may lead to higher price competition than expected.

Fitch noted that low earnings from the digital-TV business would put pressure on GMM's profit margin this year. Nonetheless, the profit margin is likely to improve in 2015 and 2016 as revenues from digital TV increase. With the operating costs of this business largely fixed, a large proportion of any increase in revenue translates into profit.

Because of the large investment in digital TV, GMM should maintain negative-free cash flow for at least two years, Fitch said.


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