LONDON-Moody’s Investors Service has assigned long-term ratings of Baa1 to the proposed $1 billion and $650 million bond issues of Cable & Wireless Communications, which will provide integrated telecommunications services in the United Kingdom.
Owned 52.6 percent by Cable & Wireless plc, C&WC was created in April 1997 through the merger of C&W plc’s subsidiary Mercury with three cable companies-Bell Cablemedia, Videotron and NYNEX CableComms. C&W plc plans to integrate the four merged companies to provide services such as interactive services and digital cable TV.
The Baa1 ratings reflect Moody’s expectation that although the bonds are not explicitly guaranteed by C&W plc, the company will benefit from it being majority-owned by C&W plc, together with the fact that C&WC is part of C&W plc’s core strategy, said Moody’s. It reported C&WC is a good strategic fit with Mercury’s existing business operations and a “beneficiary of the strong demand” for telecom service in the UK.
The ratings also factor Moody’s belief that C&WC’s moderate debt protection measurements will deteriorate further during the next two years as external funding is needed to finance the completion of the company’s build-out program, according to Moody’s.
“… C&WC will operate with relatively moderate debt protection ratios during the next couple of years before capital expenditure requirements diminish and the company starts generating free cash flow,” said Moody’s.
Another risk associated with the industry, said the investors service, is the ongoing consolidation and the uncertainty the impact may have on C&WC.
It said the extent of C&WC’s operating performance success remains uncertain given the “weak track record” of cable companies and the growing competitive pressure from resellers and competitive local exchange carriers, as well as pricing pressure from British Telecom plc.
Mercury’s competitive strategy has been based on price and quality, but increasing competition, tougher regulation and increased customer service-support costs required the company to implement a major restructuring and redefine its strategy, said the Moody’s ratings statement. This new focus is on “well-defined market segments” rather than competition across the board.
“We think that the merger of Mercury with three cable TV companies enhances the competitive position of the new company,” concluded Moody’s.
