Moody's Investors Service says Bharti Airtel (Bharti, Baa3 stable) withdrawal of its deal to acquire Loop Mobile (unrated) is modestly credit negative, as Bharti's competitive position will not get the anticipated boost in market share in Mumbai nor increase in Average Revenue Per User (ARPU) from Loop's more remunerative post-paid customer base. However, Bharti continues to benefit from customers porting to its network via the available MNP route.

At the time Bharti announced the acquisition, Loop had a subscriber base of about 3 million, with a higher proportion of post-paid subscribers as well as tower rights in key areas, which would have helped improve the network coverage and the overall blended ARPU for Bharti.

As a result, this development is modestly credit negative for Bharti, as it weakens company's competitive position in this key market although we do not expect it will have material adverse impact on the company's cash flow generation capabilities over the medium-term.

Moreover, this development is modestly credit negative for the Indian telecom industry, as it evidences significant hurdles to achieving a more efficient operating environment in an industry ripe for consolidation and in need of proper exit procedures for flailing companies.

In February, Bharti had announced its Rs 7 billion acquisition of Loop. Under the agreement, Loop's 3 million subscribers in Mumbai were expected to join Bharti's 4 million subscribers in the metro area, catapulting the company to the #1 position by customers in this key market ahead of Vodafone India. However, the definitive agreement which was signed in June between the two companies, and which was conditional upon the approval by the DoT, expired on October and was not renewed.

Over the last several months, the Telecom Regulatory Authority of India (TRAI) and DoT raised objections to the migration of Loop's subscribers to Bharti on grounds that the compulsory transfer of customers will break mobile number portability (MNP) rules which advocate voluntary migration. Furthermore, they cited it would cause a revenue loss to the government as the users wouldn't be paying the stipulated Rs 19 fee to change operators, as stipulated under MNP. The approval of the transaction by the relevant authorities was still outstanding on October 30.

As regulatory hurdles prevailed since the announcement in February, Loop's customer base eroded considerably to around 1.2 million subscribers in October, as subscribers ported out to Vodafone India, Bharti and Idea Cellular (Unrated). Loop's mobile license is set to expire on November 29.

At the time Bharti announced the acquisition, Loop had a subscriber base of about 3 million, with a higher proportion of post-paid subscribers as well as tower rights in key areas, which would have helped improve the network coverage and the overall blended Average Revenue Per User (ARPU) for Bharti.

As a result, this development is credit negative for Bharti, as it weakens company's competitive position in this key market although we do not expect it will have material adverse impact on the company's cash flow generation capabilities over the medium-term.

Furthermore, it will not impact any spectrum holding that Bharti has in the circle. In auctions concluded in Feb 2014 Bharti had won 5 Mhz of 900 Mhz spectrum which is expected to boost its voice and data capabilities in Mumbai and we expect Bharti to continue to benefit from its improved spectrum holding. Earlier Bharti had only the 1800 Mhz holding in Mumbai.

Shares of the company gained Rs 5.2, or 1.35%, to settle at Rs 390.50. The total volume of shares traded was 284,997 at the BSE (Friday).