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.
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