OREANDA-NEWS. Fitch Ratings says that Iliad's agreement to buy Italian mobile assets as part of the plan to merge Wind Telecomunicazioni S. p.A. (WIND, B+/Stable) and 3 Italia (H3G) increases the chances of the merger obtaining regulatory approval.

This transaction would address one of the key concerns the European anti-trust authorities have regarding a WIND/H3G merger as the number of mobile network operators in Italy would remain unchanged if the combination was approved. Iliad has signed an agreement with CK Hutchison Holdings Ltd. (A-/Stable), parent company of Italian mobile operator 3 Italia, and VimpelCom Ltd. (BB+/Stable), parent company of WIND, to acquire selected assets from operators, including frequencies and towers, as a proposed remedy for their merger. These assets would allow Iliad to create a fourth facilities-based mobile operator in Italy.

The presence of Mobile Virtual Network Operators (MVNOs) in the Italian market, which together account for more than 7% subscriber market share, is another supporting factor.

The creation of a new operator would imply that competition in the Italian market is unlikely to lessen. Fitch believes competition should remain rational as the Italian market has already gone through significant price wars in 2012-2015 and average revenues per user are among the lowest in Western Europe. Furthermore, market leaders Telecom Italia S. p.A. (BBB-/Stable) and Vodafone (BBB+/Stable) are offering competitive tariffs in a lower price range, which reduces discounters' propensity to use price-disruptive tactics. With the growing importance of mobile data, network quality is becoming an important differentiating factor for consumers. Iliad may need time to establish brand recognition and a network of appropriate quality, which may defer the negative impact on competitive intensity.

The impact of the Iliad deal on the merged WIND/H3G and its final capital structure will depend on the total disposal proceeds received from Iliad, the nature of the roaming agreement with Iliad and any other regulatory remedies the anti-trust authorities may impose.

We do not believe these developments will affect WIND's ratings. On a standalone basis, WIND's rating corresponds to 'B'; this is uplifted by one notch for potential parental support from Vimpelcom Ltd. We expect to remove this rating uplift once the deal is closed as the merged entity will not have the undiluted support of a single significant majority shareholder. With the anticipated operating profile improvement once the proposed merger is completed, the leverage profile of the merged entity will be commensurate with a standalone rating of 'B+'. Funds from operations adjusted net leverage sustainably below 4.75x could support a 'BB-' rating.

The merger should not have any impact on VimpelCom Ltd.'s ratings as WIND is ring-fenced. WIND's debt is non-recourse to VimpelCom and WIND's default on its obligations will not trigger a cross-default on VimpelCom's debt. In our view, VimpelCom cannot reasonably expect any cash flows from this subsidiary in the short to medium term as WIND will remain focused on deleveraging.