OREANDA-NEWS. Fitch Ratings believes the discontinuation of talks between Telstra Corporation Limited (Telstra, A/Stable) and conglomerate San Miguel Corporation (SMC) will delay the entry of a formidable third telco into the Philippines' market. This will support the credit strength of the incumbents - Philippine Long Distance Telephone Company (PLDT, BBB/Stable) and Globe Telecom (BBB-/Stable) - in the short term.

However, the medium- to long-term threat of greater competition remains as SMC said it will still proceed with its own network rollout as scheduled, and will consider other joint venture opportunities in the future.

SMC owns the 700MHz spectrum frequency, coveted by the incumbents for its cost-efficiency due to wider coverage and in-building penetration than the higher frequency bands. PLDT and Globe have requested that the National Telecommunications Commission "equitably" re-distribute these frequencies among the telcos in support of a more cost-efficient rollout of 4G services. We believed that Telstra's technology expertise and financial muscle would have been very valuable to the SMC JV.

Fitch still expects the incumbents to invest in greater capacity this year, with industry capex to stay high at around PHP80bn in 2016 (2015: PHP75bn, 2012-2014: PHP55bn-58bn/year). Of the two incumbents, Globe has a larger exposure to the mobile sector - which accounts for 76% of its revenue - following its gain in revenue share in the post-paid segment. By comparison, PLDT's wireless business contributes 63% of its revenue, and fixed-line accounts for the rest.

The Philippines' mobile market is predominantly 2G, despite its high mobile saturation. We believe there are strong value propositions for faster 4G LTE services, and the entry of SMC would have a greater impact on industry profitability over the longer term.