Vodafone could be downgraded by one-notch, if it acquires Kabel Deutschland Holding (KD) without taking other measures to reduce debt, Fitch Ratings says.
The potential transaction would increase FFO adjusted net leverage to above 2.5x (2.4x at end March 2013), which they said they see as a key threshold for Vodafone’s ‘A-‘/Stable rating.
Acquiring KD, which generated EUR848m of adjusted EBITDA in the twelve months to December 2012, could cost Vodafone about EUR10bn on a debt-free basis. Vodafone could take a number of steps to offset this possible deterioration in credit metrics, including selling some, or all, of its stake in Verizon Wireless. Fitch said that it would expect to hold a rating committee if Vodafone announced an offer to buy KD or a similar European operator.
The strategic challenge facing Vodafone is whether it should remain mobile-focused, aiming to offer the best service and value for mobile broadband connectivity, or whether it should beef up its fixed-line capabilities to match its European competitors. Germany is Vodafone’s largest market and a KD acquisition would give Vodafone a high-speed broadband network to compete more effectively against Deutsche Telekom as fixed and mobile services increasingly integrate.
Vodafone has said it would take decisions on European fixed-line infrastructure on a country-by-country basis and that it could obtain this infrastructure by buying an existing operator, building its own or agreeing a wholesale deal with an incumbent. Fitch does not expect Vodafone to make acquisitions in all of its major European markets. It is building a fibre network in Spain with France Telecom while fixed-mobile integration is less of a risk in the UK as fixed-line incumbent BT Group does not have a national mobile network. However, the debt ratings agency said that is believes Vodafone is still looking for a fixed-line solution in Italy, which could point to further acquisition risk.
Vodafone has a strong liquidity position and a possible purchase of KD could be financed from existing cash and investments and by drawing down on existing credit lines.
Fitch expects to publish a more detailed Special Report on Vodafone in the next few weeks, which will examine the challenges it faces in Europe and the potential impact of a sale of its Verizon Wireless stake.