(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
- 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
- A rise in leverage equal to or above 3.5x funds from operations (FFO) adjusted
without a clear path to deleveraging;
- Pressure on free cash flow driven by EBITDA margin erosion, higher capex and
distributions, or significant underperformance at key subsidiaries.
For all of Fitch's Eurozone Crisis commentary go to here
(Caryn Trokie, New York Ratings Unit)