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Global Credit Research - 21 Mar 2011
New York, March 21, 2011 -- Note: Ratings actions updated to include short-term rating.
Revised release follows.
Moody's Investors Service placed all of the ratings of AT&T Inc.'s
("AT&T") debt under review for possible downgrade following the company's
announcement that it will acquire T-Mobile USA from Deutsche Telekom
("DT" - Baa1 Stable) in a cash and stock transaction, currently
valued at approximately $39 billion. Of the purchase price,
$25 billion is to be paid in cash and $14 billion in AT&T
stock, although the company has the option to upsize the cash portion
of the purchase by up to $4.2 billion. The combination
of the No.2 (AT&T) and No.4 (T-Mobile USA) wireless
carriers in the U.S. will create a leading operator,
which on a pro forma basis will serve about 130 million subscribers,
encompassing about 43% market share.
The transaction is expected to be completed in 2012, following an
expected close scrutiny by the various regulators and government entities.
As such, Moody's review may take up a similar time frame since regulatory
orders could have an impact on AT&T's future operating and financial
performance. The acquisition agreement has been approved by the
Boards of Directors of both companies, and AT&T agreed to a
$3 billion break-up fee, along with a commitment to
dispose wireless spectrum frequencies to T-Mobile if the transaction
does not close.
As part of the rating action, Moody's also placed the ratings of
AT&T's subsidiaries under review for downgrade, including AT&T
Mobility ("Mobility"). Even though AT&T's wireless operating
subsidiary is expected to receive the bulk of operating benefits from
the pending acquisition of T-Mobile USA, Mobility may be
forced to dispose of certain assets, which may weaken its credit
Moody's has taken the following rating actions:
On Review for Possible Downgrade:
All AT&T debt ratings including the P-1 short-term rating
are placed on review for possible downgrade.
Given AT&T's moderate cash balances, Moody's anticipates the
company will raise about $20 billion in new debt to help fund the
cash portion of the acquisition. On a proforma basis, the
company's adjusted Debt/EBITDA leverage will rise to about 2.4
times at closing (using Moody's standard adjustments, which add
about 0.7 times to the company's reported calculations).
As such, many of AT&T's financial metrics will be outside the
boundaries expected for an A2-rated issuer, and specifically
the 2.0 times adjusted Debt/EBITDA leverage which Moody's has previously
identified as a potential downgrade benchmark.
Moody's Vice President, Gerald Granovsky, said that "Moody's
recognizes the strategic merits of the proposed transaction, including
enhanced operating scale, significant adjacent spectrum holdings,
similar wireless network technologies and a complementary path to 4G upgrades.
However, given the nature of upfront spending on integration and
investments required to turn around T-Mobile's operations,
AT&T's credit metrics will not likely revert to historic levels until
2013 or 2014."
Moreover, given the lengthy expected regulatory review process,
AT&T will not realistically be in a position to get critical data
on the acquired customer metrics until one or two quarters following the
acquisition. As T-Mobile USA has lost customers in 2010,
AT&T's immediate challenge will be to stem further subscriber losses
in the acquired territories.
Still, AT&T believes that it will attain at least $3
billion in annual cost synergies from the transaction, while much
of the free cash flow generated between now and closing will be used towards
the cash purchase price, potentially reducing the estimated debt
that it will need to raise. In addition, Moody's does not
expect the company to resume its stock buybacks until it has restored
its stated Debt/EBITDA leverage levels back to between 1.3 times
and 1.5times. Therefore, as part of the review,
Moody's will assess management's commitment and ability to restore its
credit profile in light of the intense competitive challenges confronting
the sector and the resulting pressures to achieve the targeted cost savings.
The principal methodology used in rating AT&T was Moody's rating methodology
for Global Telecommunications Industry published in December 2010.
Moody's most recent rating action for AT&T was on December 21,
2010. At that time Moody's changed the ratings outlook on AT&T
Inc., AT&T Mobility and BellSouth to stable from negative.
AT&T, the largest telecommunications company in the USA,
is headquartered in Dallas, Texas.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Correction to Text, March 21, 2011 Release: Moody's places AT&T debt on review for downgrade following T-Mobile acquisition announcement
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