TEXT - Fitch rates Telefonica Deutschland

Wed Jan 16, 2013 12:40pm EST

(The following statement was released by the rating agency)

Jan 16 - Fitch Ratings has assigned Telefonica Deutschland Holding AG (TEF DE) a Long-Term Issuer Default Rating (IDR) of 'BBB' with a Stable Outlook and a senior unsecured rating to Telefonica Germany GmbH & Co OHG of 'BBB'. The ratings reflect TEF DE's stand-alone position in a competitive market with four players, which is largely dominated by the two larger operators, Deutsche Telekom and Vodafone. The ratings take into account the company's somewhat limited scale, competitive position and single market dependence, offset by a financial profile that otherwise compares well with the peer group. A free cash flow margin of 13.7% (2011) suggests an ability to deleverage in time of need, albeit stated financial policy is to distribute free cash flow to the extent necessary to maintain leverage (net debt to EBITDA) below 1.0x over the medium term. Single Market Integrated Operator: With 19.1m mobile customers and 2.4m fixed broadband customers (at Q312), TEF DE is the country's third largest integrated network operator. While the market number four in terms of mobile customers, in a market dominated by incumbents' T-Mobile and Vodafone, the competitive environment appears rational and TEF DE is likely to benefit over time, from market number three E-Plus's lack of 800 MHz spectrum. The company's fixed line presence -largely a result of the Hansenet acquisition in 2010 - is limited and unlikely to grow. Although not disclosed by the company, alternative operator fixed line operating margins, are typically low and will be dilutive to the company's margin structure. Economic Environment: The largest, and one of the few growing economies in Europe, Germany benefits from low unemployment, strong consumer confidence and high levels of private consumption. The telecom market remains reasonably resilient, with TEF DE positioned most notably in the more vibrant segments of mobile (voice and data) and fixed broadband (which it combines with fixed voice), which collectively are expected to account for over 70% of telecom revenues in 2012. Smartphone penetration of 29% is relatively low providing reasonable growth potential. Independent Management & Financial Policy: TEF DE's management are independent of the parent and dedicated to managing the German business. With the exception of CEO - Rene Schuster - who sits on the Telefonica Europe Board - the senior management are solely responsible for running the German operations (i.e. have no wider group responsibilities). The supervisory board comprises six shareholder representatives (one of whom is independent) and six employee representatives. Measured Business Plan: The company's business plan is built around an assumption that it will be able to take modest incremental share from its mobile competitors - not an unreasonable assumption given its challenger position and spectrum advantage over E-Plus - and to shift the mix of its prepay / postpay base. Its fixed line position is primarily a defensive strategy allowing it to meet the demand for integrated services, with Fitch not expecting any meaningful growth in this part of the business. Fitch's view is that the business plan represents a reasonable reflection of market conditions and extrapolation of the company's present strategy. Modest Spectrum Risk LTE spectrum was acquired and paid for in 2010, removing a significant potential variable from budgeted capex, with what appear sufficient levels of tangible investment in LTE budgeted for each of the next two years, suggesting a recognition and commitment to network quality and need to remain competitive from a bandwidth and speed perspective. While 2G spectrum renewal is scheduled for 2015 or 2016, Fitch assumes this will be a manageable cost. Parent- Subsidiary Linkage TEF DE's ratings have been assigned on a largely stand-alone basis, although with some ultimate linkage to the parent. While benefiting from group-wide synergies, the company has been established as a stand- alone entity, with separate management, independent governance and its own financial policy. Given its scale and maturity Fitch regards TEF DE as a sustainable independent business with an ability to finance itself based on its stand-alone business and financial profile. In the event of a downgrade of the parent company however, Fitch guides that TEF DE could potentially be rated up to two notches higher than the parent. RATING SENSITIVITY GUIDANCE: Positive: Future developments that could lead to positive rating actions include: Given the company's current operational profile - somewhat limited scale and single geography presence - the ratings sit most comfortably at the 'BBB' level. While the financial profile compares well with the 'BBB' peer group, a higher rated single market operator would be expected to have a materially stronger (market number one or two) business position, in turn resulting in a considerably stronger margin profile. Negative: Future developments that could lead to negative rating actions include: A material weakening in the company's financial profile - driven either by operating performance or a change in financial policies - would pressure the ratings. Financial metrics likely to exert ratings pressure include:- Funds from operations (FFO) net adjusted leverage greater than 3.0x (Fitch estimate for FY2012 is 2.2x), and FFO fixed charge cover below 4.0x (Fitch estimate for FY2012 is 4.6x) (Caryn Trokie, New York Ratings Unit)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.