(The following statement was released by the rating agency)
Oct 4 - Fitch Ratings has affirmed Deutsche Telekom's (DT) Long-term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook. Fitch has also affirmed DT's senior unsecured rating at 'BBB+' and Short-term IDR at 'F2'. This includes the debt issued by Deutsche Telekom International Finance B.V. and guaranteed by DT.
An acquisition of Metro PCS somewhat improves DT's positions in the US - it beefs up the company's spectrum portfolio and facilitates its LTE roll-out, and increases the entities size. It also increases DT's strategic options regarding this entity as it would be a US-listed company. The transaction is to be made via a share swap and does not increase the group's leverage. However, the deal does not address the issue of heavy post-paid losses in the US, and it remains to be seen how much success the new company will have with its plans to migrate Metro PCS's CDMA subscribers to T-Mobile USA's GSM/HSPA+ network.
At present Fitch will treat DT's interest in the new subsidiary on a full consolidation basis as DT's high shareholding stake and a significant amount of shareholder loans make this subsidiary strategically important for DT. A reduction in DT's shareholding interest to or below 60% may have an impact on how this subsidiary is treated by Fitch for leverage metrics calculation. The treatment may change to either proportional consolidation or de-consolidation depending on how strategically important Fitch views this company for the group. A significant amount of shareholder loans remaining on DT's balance sheet at this point may have a negative impact on DT's net debt and leverage on a stand-alone basis perhaps, also reflecting proportional consolidation of the new company (newco). Shareholder loans to the newco will be not treated as cash equivalents, and will not be viewed as reducing DT's net debt position.
DT is acquiring a dominant 74% stake in newco that will be created by merging T-Mobile USA, DT's fully controlled subsidiary and the fourth largest mobile operator in the US, and Metro PCS, a regional CDMA operator. The transaction will be organised as a reverse merger, i.e. technically Metro PCS will acquire T-Mobile USA with newly issued shares. DT will end up with 74% in the new company. The deal is subject to Metro PCS shareholders and regulatory approval, and is expected by the transaction parties to be closed in H113. Fitch believes the deal is unlikely to face significant regulatory objections. Metro PCS is a listed company, and the newco will also remain US-listed.
Integration of CDMA and GSM networks may prove challenging. Metro PCS operates a CDMA network while DT operates a GSM network. The plan is to migrate all Metro PCS customers to DT's network. Customer migration should be helped by high handset replacement rate of 65% per annum for Metro PCS subscribers. Both CDMA and GSM networks will be operated for some time, but the CDMA network is slated for shut down by H215.
The deal should significantly improve the newco's spectrum position facilitating a smoother LTE roll-out. The newco will have 72Mhz of spectrum in 100 major markets post the transaction vs. 61 MHz at T-Mobile USA and 11 MHz at MetroPCS currently. On a positive note, the spectrum positions of both companies are highly complementary. MetroPCS spectrum will be gradually refarmed for LTE and HSPA+ usage. The deal is expected to improve in-building coverage by 20%.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead to positive rating
- A commitment to a lower leverage target
- Stabilisation of operating performance across the entire franchise
Negative: Future developments that may, individually or collectively, lead to negative rating
- A rise in leverage equal to or above 3.5x funds from operations (FFO) adjusted net leverage
without a clear path to deleveraging;
- Pressure on free cash flow driven by EBITDA margin erosion, higher capex and shareholder
distributions, or significant underperformance at key subsidiaries.
For all of Fitch's Eurozone Crisis commentary go to
(Caryn Trokie, New York Ratings Unit)