Fitch Ratings has placed Vodafone Group’s debt ratings under review for a possible downgrade, following the announcement of its intentions to acquire Kabel Deutschland in an offer representing an enterprise value of EUR10.7bn.
Fitch said that Vodafone’s existing A+ rating is likely to be downgraded by one notch if it acquires KD without taking other measures to reduce debt. If completed, the transaction would increase FFO adjusted net leverage above 2.5x (2.4x at end March 2013), which the ratings ageny sees as a key threshold for Vodafone’s ‘A-‘/Stable rating.
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.
Vodafone expects FY2013 net debt/EBITDA to increase from 2.0x to 2.4x, proforma for this transaction, and the receipt of the USD3.2bn Verizon Wireless dividend announced on 14 May 2013. Fitch expects Vodafone’s FFO adjusted net leverage to reach 2.9x at the end of March 2014 (2.4x at end March 2013) on a proforma basis if KD is successfully acquired. Fitch’s scenario analysis shows that Vodafone’s leverage is unlikely to come back down to 2.5x within the next two years, even taking into account cost and capex synergies, and the retention of future Verizon Wireless dividends.
Strategic Position in Germany
Germany is Vodafone’s largest market and the acquisition of KD would give Vodafone a high-speed broadband network to compete more effectively against Deutsche Telekom as fixed and mobile services become increasingly more integrated.
Potential Acquisition Risk
Vodafone faces similar strategic challenge choices in its other European markets as to whether it should remain mobile-focused, aiming to offer the best service and value mobile broadband connectivity, or whether it should improve its fixed-line capabilities to match its main European competitors.
Vodafone has said it will 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 doed 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 agency said that it believes Vodafone is still looking for a fixed-line solution in Italy, which could point to further acquisition risk.
Liquidity Not a Concern
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 added that measures taken to keep FFO adjusted net leverage below 2.5x on a sustained basis would lead to the ratings being removed from the negative review and affirmed. This assumes that there is no significant deterioration in Vodafone’s operating profile.