Fitch Takes a Closer Look at Verizon's Wireless Deal
In a new special report, Fitch Ratings reviews the effects on Verizon Communications Inc.'s (Verizon) ratings and capital structure following its agreement to acquire Vodafone Group, PLC's (Vodafone) 45% stake in Verizon Wireless.
On Sept. 3, 2013, Verizon announced the acquisition Vodafone's ownership interest in Verizon Wireless for $130 billion, primarily in cash and stock. Once completed, VZ will own Verizon Wireless in its entirety.
Fitch lowered Verizon's Issuer Default Rating by one notch as the acquisition will pressure Verizon's near-term credit metrics; pro forma leverage at closing will approximate 2.8x. Subsequent to the close of the acquisition, Fitch expects Verizon Wireless's free cash flow (FCF) to enable Verizon to reduce debt. EBITDA growth, combined with debt reductions, is expected to reduce leverage to approximately 2x by the end of 2016, which Fitch believes is appropriate for an 'A-' rating.
Leverage will be outside an appropriate range for an 'A-' rating for several years. However, Fitch believes Verizon's strong position in the wireless industry and significant cash flows generated by the wireless business, in combination with management's commitment to delever, provide support for limiting the downgrade to one notch. Management's commitment to delevering has been shown in the past by the aggressive delevering following the acquisition of Alltel Corporation in early 2009. Other supporting factors include the absence of operations-related execution risk.
The strong competitive position of Verizon Wireless as evidenced through industry low churn rates, high margins, and the most developed LTE network in the U.S. is key to the cash flow stability of VZ and the longer rating horizon used in this action.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
'Corporate Rating Methodology' (Aug. 5, 2013);
'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research: Verizon Reaches Deal on Wireless (A Look at Rating and Capital Structure Effects)