Moody's Rating Negative Outlook on Vodafone
Vodafone Group Plc (Vodafone) is one of the world's largest operators of mobile telecommunications networks.
The group operates in more than 30 countries, and has partner market arrangements in more than 50 countries.
Vodafone had more than 419 million customers worldwide (on a proportionate basis) and reported revenues of GBP44.7 billion and EBITDA of GBP13.5 billion for the last twelve months ending in September 2013. The opinoin of Moody's is that the next move will be Broadband.
Wow this is all scary, who realised that there was so much money in telecoms--- In-fact the actual cost of an international call is now only pennies. This has lead to a plethora of VMNO (mobile Virtual Network Operators )
The fact is that only 4 mobile telephone companies in the UK have a network of Cellular aerials. Most of the UK’s telecom companies are in fact MVNO (mobile Virtual Network Operators )
Now we are able to create your own company, such as Virgin Mobile, Tesco Mobile, Gif Gaf and offer low cost international calls from your mobile phone.
Any way back to Moody’s Ivan Palacios continues.......
Vodafone Holding GmbH
Outlook Negative
Issuer Rating A3
Moody’s Analyst Ivan Palacios who is based in Madrid 00 34.91.768.8200
& Carlos Winzer /Madrid Paloma San Valentin / and London 0044.20.7772.5454
Vodafone's core assets comprise its operations in Germany, Italy, the UK and Spain, which together accounted for approximately 49.1% of the GBP44.7 billion of revenues that the group reported for the last twelve months as of September 2013. The group's other core operations outside of Western Europe are India and South Africa. The remainder of its revenues is generated by many smaller, and sometimes faster-growing, mobile businesses, mainly in emerging markets.
In June 2013, Vodafone announced the acquisition of German cable operator Kabel Deutschland Holding AG (KDH) for a total consideration of GBP9.2 billion. In September 2013, Vodafone agreed to sell its 45% stake in VZW to Verizon Communications for USD130 billion (GBP84 billion). The transaction closed on 21 February 2014.
In March 2014, Vodafone agreed to acquire Grupo Corporativo ONO (rated at Cableuropa S.A.U.) for a total consideration of EUR7.2 billion (GBP6.0 billion). ONO is the second-largest provider of broadband internet, pay television and fixed telephony services in Spain. The transaction is subject to anti-trust clearance and is expected to close in Q3 2014. We believe that there is a high degree of certainty that this transaction will receive the required approvals.
SUMMARY RATING RATIONALE
Vodafone's A3 rating reflects its large size and scale, and the diversification benefits associated with its strong positions in many different markets. The rating also takes into account management's approach of balancing shareholder remuneration with creditor protection. However, the rating additionally 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. While the group is increasing its ownership of fixed-line assets in its core markets, this has led to an increase in event risk.
DETAILED RATING CONSIDERATIONS
SCALE AND GEOGRAPHICAL DIVERSIFICATION ARE KEY TO OFFSET WEAKNESSES IN SOME WESTERN EUROPEAN MARKETS
Vodafone's rating reflects the diversification benefits associated with its strong positions in many different countries. The unrivalled diversity of Vodafone's market reach (in 2013, the group operated mobile subsidiaries in 14 European markets and in seven markets across Africa, the Middle East and Asia-Pacific) has so far enabled the group to offset the declining trends in countries in the periphery of the Southern Europe region (where service revenues declined by around 11% year-on-year as of December 2013), with stronger performance in the other countries where it operates. The weak performance in some of Vodafone's core European markets was particularly visible in Spain and Italy, where the group had to take a GBP7.7 billion impairment charge in FYE March 2013 (Spain and Italy combined represented around 19% of group revenues and EBITDA for the last twelve months as of September 2013).
We expect South Africa and India to become larger cash flow contributors to the group, thereby offsetting the weaker cash flow generation in Southern Europe. However, the group does not fully own its subsidiary in South Africa (65%) but fully consolidates it. We note that upstreaming cash from South Africa will therefore be subject to cash leakage to minorities.
VODAFONE IS ACQUIRING CABLE ASSETS TO OFFSET STRUCTURAL CHALLENGES LINKED TO ITS MOBILE-CENTRIC FOCUS AND CHALLENGER MARKET POSITION VODAFONE IS ACQUIRING CABLE
Given the ongoing pace of technological change, an integrated telecoms business model is more robust than either a standalone fixed-line operation or a wireless business. As markets converge, a position in both fixed-line and mobile should enable an operator to benefit from developing growth trends in either or both segments, as well as to hedge its exposure to slowing sub-segments, such as fixed-voice. We view favourably an integrated business model because it provides greater flexibility to offer clients bundles efficiently, and better positions telecom operators to take advantage of the convergence of fixed-line and mobile networks.
In our view, Vodafone is facing a number of challenges as a result of its mobile-centric business model. As a market challenger, Vodafone has to compete with incumbents that are striving to regain market share by launching quadruple-play convergent offerings in which the mobile service is offered at a discount. The lack of significant network differentiation and the transition from voice-centric to data-centric tariffs will be a challenge for Vodafone in its efforts to monetise the expected growth in data traffic. At the same time, we believe that Vodafone has less capacity to cut operating expenses, given that it has a leaner structure than the incumbents. Moreover, Vodafone's higher exposure to MTR cuts and to roaming traffic - owing to its pan-European footprint - renders it more exposed to regulatory risk compared with incumbents.
In order to improve its business proposition in some countries, Vodafone has selectively acquired fixed-broadband assets in certain countries. To date, Vodafone's M&A activity in this segment has been limited to Cable & Wireless in the UK, TelstraClear in New Zealand, KDH in Germany and ONO in Spain. ONO will improve Vodafone's business profile in Spain, its sixth-largest market in terms of cash flow generation. The combined entity will have a fixed broadband market share of around 21% and 14.8 million mobile subscribers, based on data from the Spanish telecoms regulator.
Integrating its mobile business with ONO allows it to better compete with the integrated incumbent Telefonica S.A. through a competitive convergent offering of wireless, Pay-TV and internet services. In addition, Vodafone will migrate ONO's mobile traffic to its own network, and it will leverage ONO's infrastructure for mobile backhaul.
Finally, Vodafone's fiber-to-the-home (FTTH) build programme will be refocused towards areas where ONO has limited or no presence.
Vodafone has confirmed that it will stick to its market-by-market strategy combining selective fibre deployment, reaching wholesale agreements with the incumbents and M&A.
VODAFONE HAS EXHAUSTED THE FINANCIAL FLEXIBILITY IT HAD CREATED WITHIN THE A3 RATING FOLLOWING THE SALE OF ITS 45% STAKE IN VZW
In September 2013, Vodafone reached an agreement with Verizon Communications, Inc (Baa1 stable) for the sale of its 45% equity stake in VZW for $130 billion (GBP84 billion). The transaction closed on 21 February 2014.
Following the announcement of the sale of its 45% stake in VZW, we confirmed Vodafone's ratings with a stable outlook, reflecting our expectation that its credit metrics will improve materially given that some of the substantial proceeds from this sale will be retained in the business to reduce net debt, pay for the acquisition of KDH and accelerate capex to support Vodafone's competitive positioning in its core markets.
After the announcement of ONO's acquisition in Spain in March 2014 we changed the outlook on Vodafone's ratings to negative reflecting our views that the potential benefits for Vodafone of acquiring ONO could be outweighed by the heightened financial risk implied by the increased debt burden and that Vodafone had exhausted the financial flexibility within the A3 rating that it had created following the sale of its 45% equity stake in Verizon Wireless.
The expected deterioration in Vodafone's credit metrics following the acquisition could lead to a downgrade of the rating over the next 12 months if the company does not strengthen its financial profile.
Vodafone distributed 65% (or GBP54.3 billion) of the total GBP84 billion proceeds from the sale of VZW to its shareholders, while around GBP7 billion will be used to fund their organic investment programme called Project Spring, GBP9.2 billion will fund the acquisition of KDH, GBP6.0 billion to fund the acquisition of ONO and only GBP4.2 billion will reduce net debt.
We estimate that pro forma for ONO's acquisition, Vodafone's adjusted debt/EBITDA will increase by 0.4x to 2.4x- 2.7x exceeding the 2.25x level that Moody's had indicated for downward pressure on the A3 rating. We expect the group's retained cash flow (RCF)/adjusted net debt ratio to remain below 30%, also weaker than our indicated level for the A3 rating.
RENEWED INVESTMENT FOCUS COULD CREATE POWERFUL COMPETITIVE ADVANTAGE FOR
VODAFONE IN EUROPE
two financial years. It plans to invest the majority of the total two-year plan, around 45% to 50%, in its mobile
network in order to accelerate 4G deployment and increase 3G capacity and coverage in Europe and key
emerging markets. The second largest allocation, up to 25% of the programme, will improve Vodafone's highspeed broadband service, demonstrating the importance of a quadruple play telecommunications offering in Europe. We believe that this renewed investment focus could turn out to be a powerful competitive advantage for Vodafone in Europe.
Project Spring will increase Vodafone's capex by around 50% in the next two years. We estimate that reported capex as a percentage of sales could exceed 20% by fiscal 2015, compared to the 15% industry average. This
aggressive move could force some operators to react to match Vodafone's increased investment. However, not many operators have the financial flexibility to do this.
Liquidity Profile
Vodafone has a strong liquidity profile, which enables the group to cover its debt maturities and other expected cash demands, including the acquisition of ONO, over the next 12months, without the need to access the capital markets.
In addition to free cash flow generation, the group's sources of liquidity include its holdings of cash and liquid investments, which amounted to around GBP10 billion as of September 2013. In our forecasts, we estimate a normalised cash balance of around GBP5 billion.
These liquidity sources are supplemented by its committed credit facilities of approximately GBP7.7 billion. The undrawn facilities include a revolving credit facility of USD4.2 billion maturing in March 2017 (USD155 million matures in March 2016), and a EUR4.2 billion revolving credit facility due in July 2015. Both facilities are free from material adverse change clauses, but do contain one financial covenant. However, we expect Vodafone to maintain a financial profile such that the existing covenant is unlikely to restrict the utilisation of the facilities.
The bank facilities support Vodafone's USD and euro commercial paper (CP) programmes of USD15 billion and EUR5.5 billion.
Rating Outlook
The negative outlook reflects the weakness of Vodafone's credit metrics for the A3 rating category, with no headroom for deviation in terms of operating performance or for further debt-financed acquisitions. Moody's expects that Vodafone will strengthen its financial profile over time, derives comfort from Vodafone's long-standing commitment to maintaining an A3 rating and recognises the benefits for its business profile of the strategy of securing fixed-line assets.
What Could Change the Rating - Up
Upward pressure on the rating is unlikely in light of the negative outlook on the rating and Vodafone's current financial policies, which target a low-single A rating. However, longer-term, upward pressure could be exerted on the rating if Vodafone's credit metrics were to strengthen on a sustainable basis, with an RCF/net adjusted debt ratio comfortably in excess of 40% and an adjusted debt/EBITDA ratio decreasing below 1.5x, along with demonstrated strong free cash flow generation.
What Could Change the Rating - Down
The rating could come under downward pressure if Vodafone's financial profile does not strengthen such that its adjusted RCF/net debt ratio remains sustainably below 30% and its adjusted debt/EBITDA ratio remains above 2.25x for a sustained period of time.
Other Considerations
RATING METHODOLOGY GRID
The methodology grid outcome for Vodafone is A3, based on the group's audited results for the fiscal year ended March 2013, and Moody's standard adjustments. The grid outcome is positively influenced by stronger qualitative factors, reflecting the group's scale and wide geographical diversification. These factors are partly offset by quantitative factors that map, on balance, to a Baa rating. Our methodology grid outcome for our forward looking grid is Baa1, one notch below the A3 rating assigned, mainly as a result of the impact of Vodafone's acquisition of ONO and the one-off effect from the extra capex investment from Project Spring on the FCF/Net debt and (EBITDA-Capex)/interest ratios.
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