Vodafone is facing a second debt ratings downgrade review following its EUR10.7 billion takeover bid for Germany’s Kabel Deutschland.
Moody’s said that it has places Vodafone under review for a possible downgrade. Earlier this week Fitch Ratings also put Vodafone under review.
“Placing Vodafone on review for downgrade reflects our view that the potential benefits of acquiring KDH could be outweighed by the heightened financial risk implied by the increased debt burden,” says Iván Palacios, a Moody’s Vice President — Senior Credit Officer and lead analyst for Vodafone. “This is a large transaction for Vodafone, which the company will fund primarily with existing cash resources and debt, resulting in a deterioration in its credit metrics.”
Moody’s estimates that pro forma for the acquisition, Vodafone’s adjusted debt/EBITDA will increase by 0.6x, resulting in Vodafone’s leverage exceeding the 3.25x level that Moody’s had indicated for downward pressure on the A3 rating. The rating agency expects the group’s retained cash flow (RCF)/adjusted net debt ratio to remain below 30%.
In Moody’s view, the transaction is fully priced with an EV/EBITDA multiple of 12.4x, higher than the 9x multiple at which the European cable sector is currently trading. While the combination of Vodafone and KDH should lead to substantial synergies, both in terms of costs and capex and in terms of revenues, there is nevertheless a degree of execution risk in delivering these synergies.
In addition, Moody’s said that this acquisition demonstrates the strategic importance of fixed-line asset ownership for Vodafone, which could increase event risk should the group intend to complete similar deals in other European countries where it lacks a relevant fixed-line exposure.
Moody’s notes that mitigating these negative considerations is the fact that the acquisition of KDH will improve Vodafone’s business profile in Germany, its largest and most important European market. Since Vodafone is facing a number of challenges as a result of its mobile-centric business model, integrating its mobile business with a cable provider allows it to better compete with the incumbent through a competitive convergent offering. In addition, Vodafone will reduce its dependence on the network of Deutsche Telekom AG (Baa1 stable), and leverage KDH infrastructure for mobile backhaul.
Moody’s recognises that Vodafone has a strong liquidity profile, which enables the group to fund the deal with existing cash resources and available credit facilities, without the need to access the capital markets over the next 12 months.
Vodafone’s A3 rating reflects its large size and scale, the diversification benefits associated with its strong positions in many different markets and the financial flexibility it derives from its 45% equity stake in Verizon Wireless. In addition, the rating takes into account management’s approach of balancing shareholder remuneration with bondholder protection. However, the rating also factors in the negative trends experienced in Vodafone’s core western European markets, including heightened competition, slowing growth, regulatory pressures and macroeconomic weakness. Furthermore, the rating reflects the structural challenges that Vodafone faces in light of its mobile-centric business model and position as challenger in most of the markets in which it operates.