Verizon Communications’ history of quickly cashing in on previous acquisitions has convinced at least one credit rating service that its pending deal to purchase the remaining stake in Verizon Wireless for $130 billion deserves the benefit of the doubt.
In a report, Fitch Ratings noted that Verizon’s plans to acquire Vodafone Group’s 45% stake in the domestic carrier forced it to lower its credit rating on the telecommunications giant from an “A” to an “A-,” but noted that the leverage position that will result from the deal should have resulted in a greater slice. Fitch reported that it lowered Verizon’s “issuer default rating” following last month’s announcement of the deal as it will “pressure Verizon’s near-term credit metrics; pro forma leverage at closing will approximate 2.8x.” However, the ratings firm added that Verizon Wireless’ free cash flow, which will be flowing exclusively into Verizon’s coffers, will enable the company to cut debt and reduce leverage to approximately 2x by the end of 2016.
Fitch admitted that the initial leverage ratio would be outside of the “appropriate range for an ‘A-’ rating for several years,” but that history has shown Verizon’s ability to generate cash flow and thus limit 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,” Fitch wrote, citing that $28.1 billion deal. “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 [United States is key to the cash flow stability of [Verizon] and the longer rating horizon used in this action.”
Verizon Wireless has been a financial juggernaut for Verizon and Vodafone, posting industry-leading revenues of more than $75 billion in 2012, compared with just over $70 billion in 2011. The carrier also posted nearly $22 billion in operating income in 2012, compared with just over $18 billion in 2011, and is expected to maintain operating margins of near 50%.
The Vodafone deal will see Verizon forking over $58.9 billion in cash and $60.2 billion in stock. In addition, Verizon will issue $5 billion in notes payable to Vodafone; sell its 23% interest in Vodafone Italy for $3.5 billion, thereby providing Vodafone with full ownership of Vodafone Italy; with the remaining $2.5 billion of the transaction value a combination of “other considerations.” Verizon’s funded the cash portion of the transaction through the largest corporate debt offering. Verizon’s stock (VZ) has been up more than $3 per share since the deal was announced, having recently settled back to being up just over $1 per share.
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