RE: To make matters worse17 Jul 2019 19:37
(Continued) We acknowledge that the 40% dividend reduction should support Vodafone's leverage reduction prospects over the next three years. However, the 5G spectrum acquisition in Germany amounted to about €1.9 billion, significantly more than we initially expected. This will more than offset the dividend cut in FY2020. In addition, Vodafone is facing additional 5G spectrum auctions in other markets, including the U.K. Although we think these auctions will be more benign than the ones in Italy and Germany, they could still prevent meaningful reduction in leverage over the next two years.
In addition, Vodafone has been facing operational challenges in Spain, which we think will continue--albeit to a lesser extent--in FY2020 on the back of the loss of soccer rights. It also faces macroeconomic weakness in South Africa, which has harmed consumer spending in a wireless telecom market that is predominantly prepaid. We currently forecast only flat organic revenue growth for Vodafone's European operations in FY2020, reflecting continued weakness in Spain and the remaining fallout from repricing in Italy in FY2019.
As a result, absent further significant disposals, we expect only a very gradual reduction in leverage from 2021, predominantly supported by cost efficiencies and, to a lesser extent, discretionary cash flow generation, after spectrum acquisition and dividends. We also expect integration costs during the two years following the acquisition to largely offset the contribution of synergies. We forecast that adjusted debt to EBITDA will decline to about 3.2x by FY2022. We do not anticipate reduction to less than 3x under our forecast horizon, absent any meaningful asset sale, which we generally see as more opportunistic in nature.
We take into account Vodafone's dividend cut and commitment to create headroom under its net debt to EBITDA target of 2.5x-3x. However, Vodafone has not committed to remaining at or below 2.5x, so we currently see this mainly as supportive for its prospects of maintaining a 'BBB' rating after the closing of the acquisition.
We intend to resolve the Credi****ch placement upon closing of the acquisition of assets from Liberty Global, which we expect will take place within the next three months.
We expect to lower the rating by one notch to 'BBB' upon the transaction's completion. This reflects our view that credit metrics will not be commensurate with a 'BBB+' rating for at least two years following the closing of the predominantly debt-funded acquisition (in other words, by first quarter FY2022).
That said, we do not currently see any further downside beyond the one-notch downgrade. This is because we expect the revised dividend policy, as well as operating expenditure efficiencies, to support medium-term reduction in leverage from the initial peak of 3.4x-3.5x.
In addition, any imminent material asset disposals that significantly accelerate reduction of adjusted leverage below 3x could lead us to affirm the 'BBB+
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