TEXT-S&P: GCI ratings unaffected by joint venture deal
June 5 - Standard & Poor's Ratings Services said today that Anchorage-based diversified telecommunications provider GCI Inc.'s definitive agreement to combine its wireless business with Alaska Communications Systems Group (ACS) in a joint venture does not have an immediate impact on our 'BB-' corporate credit rating on GCI. However, we do view the proposed transaction as modestly negative for GCI in that it adds risk to the company's future cash flow generation from the wireless business, based on the priority of distributions in the first four years. Under the agreement, the two companies will contribute their respective wireless assets, including spectrum licenses, cell sites, and backhaul facilities, to the partnership. GCI will purchase $100 million of ACS' wireless assets and contribute them to the joint venture, which it will operate. As a result, GCI will own two-thirds of the business. We estimate pro forma debt to EBITDA is about 4.6x for GCI, comparable to the company's leverage prior to the transaction. Our leverage calculation includes the EBITDA from GCI's businesses outside the joint venture as well as the EBITDA contribution from the wireless partnership, less the preferential cash distribution to ACS, which will be about $50 million per year for the first two years of operations and $45 million in the next two years, subject to certain penalties based on customer losses. Our pro forma calculation also includes $100 million of new debt that GCI plans to issue at the parent to fund the payment to ACS. Although leverage would be relatively unchanged under this calculation, we believe GCI is taking on a greater risk of declining cash flow over the next several years. We would expect the joint venture to lose a substantial amount of roaming revenue that ACS currently receives from Verizon beginning in mid-2013, when we expect Verizon to enter the Alaskan wireless market. GCI would receive a lower initial proportion of distributions from the joint venture and we believe that free operating cash flow (EBITDA less capital expenditures) could decline over the next few years, resulting in lower distributions to GCI given the preferential fixed payments to ACS. These factors could cause us to revise our financial risk profile, which we currently view as "aggressive." We will evaluate issue-level and recovery ratings when the company refinances its current credit facility, which we expect will be done prior to transaction close. (For more information, see "Alaska Communications Systems Group Inc. 'B+' Corporate Credit Rating Affirmed On Announced Joint Venture With GCI Inc.," published earlier today on RatingsDirect.)
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