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June 25 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has placed Vodafone Group Plc's 'A-' Long-term Issuer Default Rating(IDR) on Rating Watch Negative, following the announcement of its intentions to acquire KabelDeutschland Holding (KD) in an offer representing an enterprise value of EUR10.7bnfor KD. A full list of rating actions is below.
Vodafone's 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 we see 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.
KEY RATING DRIVERS
Higher Leverage with KD
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. We do 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, we believe 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.
For more details of our views on Vodafone's rating, see "Vodafone: What Investors Want to Know", dated 19 June 2013, which looks at Vodafone's plans for its stake in Verizon Wireless and the competitive and economic challenges it faces in Europe.
RATING SENSITIVITIES
Negative: Expectation of FFO adjusted net leverage being sustained above 2.5x would lead to negative rating action. Successful completion of the KD acquisition without Vodafone taking other measures to reduce debt would lead to a one-notch downgrade. Operationally, higher competitive intensity in key markets or a worsening of the eurozone crisis could put pressure on cash flow generation, which in turn could put pressure on the rating.
Positive: Measures taken to keep FFO adjusted net leverage below 2.5x on a sustained basis would lead to the ratings being removed from RWN and affirmed. This assumes that there is no significant deterioration in Vodafone's operating profile.
FULL LIST OF RATING ACTIONS:
Long-term IDR: 'A-' placed on RWN
Senior unsecured: 'A-' placed on RWN
Short-term IDR: affirmed at 'F2'
Commercial Paper Programme: affirmed at 'F2'
