Madrid, February 05, 2015 -- Moody's Investors Service has today affirmed the Baa2 issuer rating,
Baa2 senior unsecured debt ratings and Prime-2 (P-2) short
term ratings of British Telecommunications Plc (BT) and British Telecom
Finance B.V. The outlook on the ratings remains positive.
The rating action follows the announcement that BT has agreed definitive
terms to acquire EE Limited for GBP12.5 billion. The consideration
for EE will be payable as a combination of cash and new BT shares issued
to both Deutsche Telekom AG and Orange. The cash consideration
will be financed by a combination of new debt financing and approximately
GBP1 billion from the placing of new BT shares. The transaction
is subject to approval by the shareholders of BT and merger clearance,
in particular from the UK Competition and Markets Authority. It
is expected to complete before the end of BT's 2015/16 financial
year.
"We have affirmed BT's ratings with a positive outlook reflecting the
prudent financing of the EE acquisition and the strengthened business
risk profile of the combined entity," says Iván Palacios,
a Moody's Vice President - Senior Credit Officer and lead analyst
for BT.
"The positive outlook reflects our expectation that BT's rating
could improve over the intermediate term following the acquisition of
EE, as long as the company successfully executes its business plan,
remains disciplined in the upcoming Premier League rights auction and
the pension deficit does not materially increase from current levels."
RATINGS RATIONALE
Today's action primarily reflects Moody's view that BT's
acquisition of EE will materially strengthen the business risk profile
of the combined entity, which will benefit from increased size and
scale, and the business diversification associated with an integrated
business model. EE is one of the leading mobile operators in the
UK, with a reported 35% market share in terms of subscribers,
the best 4G coverage and the largest spectrum portfolio - although
its share of spectrum in the most efficient frequency band, below
1GHz, is fairly low.
The combined fixed and mobile network will allow BT to offer attractive
bundles of fixed voice, broadband, mobile and television services,
with which BT will gain a competitive advantage over mobile-only
players and reduce churn.
BT expects the combination to unlock significant cost and capex synergies
in areas such as procurement, distribution, branding,
marketing, head offices, call centres and networks.
The company estimates synergies of around GBP360 million per annum,
to be achieved at full run-rate in four years, while integration
costs required to achieve these synergies will be in the region of GBP600
million.
Moody's believes that these synergies and integration costs are
reasonable when compared with similar transactions in the sector.
Nevertheless, BT will remain exposed to integration risks,
as it will have to digest a very large asset, which itself has already
gone through a complex period of integration of two smaller entities (Orange
UK and T-Mobile UK).
BT will finance the deal prudently, with around 62% of total
consideration being paid with equity. As a result, the combined
entity's credit metrics will remain broadly unchanged when compared
with BT's standalone ratios pre-transaction. For the
year ending March 2017, the first full-year post-transaction
closing, Moody's expects that the new entity's debt/EBITDA
ratio will be in the 2.8x-2.9x range, and its
retained cash flow (RCF)/net debt ratio will be in the 22%-24%
range. Moody's also derives comfort from the fact that BT
has kept its financial policies and strategies unchanged, with the
intention to continue reducing net debt and achieving a Baa1 credit rating
over the medium term.
Despite these positive considerations, Moody's notes a number
of uncertainties that will continue to weigh on the rating over the next
12 to 18 months. The regulatory approval of the deal is likely
to be lengthy, and while Moody's expects that the deal will
be finally approved and any potential remedies will be limited,
this long period will delay the integration of the two businesses and
the generation of expected synergies.
In addition, BT's acquisition of EE has spurred other consolidation
moves, such as the planned acquisition of O2 UK by Hutchison.
Consolidation in the UK telecoms market and the move towards convergence
may lead to disruptive competitive responses, with weaker operators
potentially lowering prices to avoid market share losses.
BT also plans to participate in the auction for the Premier League rights
from the 2016-17 season, and there is a risk that the company
may overpay, in light of increasing inflation for sports rights.
At the same time, despite the agreed GBP1.5 billion pension
top-up payment , the pension deficit remains large and volatile,
and further drops in interest rates may lead to increases in the deficit
and a weakening of credit metrics.
RATIONALE FOR POSITIVE OUTLOOK
The positive outlook reflects the potential upward pressure on the rating
once the transaction closes in the second half of FY2015/16, given
the strengthened business profile of the combined entity, as well
as the expected gradual improvement in credit metrics. The acquisition
of a mobile operator is a step change for BT's business model,
which could outweigh the near-term execution and integration risks
of this combination.
WHAT COULD CHANGE THE RATING UP/DOWN
In light of the improved business risk profile, Moody's ratings
for BT will accommodate slightly higher leverage. As a result,
the rating agency has adjusted its ratio guidance bands for BT's
Baa2 rating category. Upward rating pressure could develop once
the transaction is completed if BT delivers the following credit metrics:
RCF/net adjusted debt of more than 22% (25% pre-transaction),
adjusted total debt/EBITDA below 2.8x (2.5x pre-transaction)
and solid free cash flow generation.
Downward pressure on the rating is unlikely given the positive outlook
on the rating. However, the outlook could stabilise if the
pension deficit increases substantially from current levels or if the
upcoming Premier League rights auction results in a significant increase
in programming costs that constrains financial performance and delays
anticipated improvement in credit metrics. Credit metrics that
would support a change in outlook to stable include RCF/net adjusted debt
in the 18%-22% range (20%-25%
pre-transaction) and adjusted total debt/EBITDA in the 2.8x
-3.5x range (2.5x-3.5x pre-transaction)
on a sustained basis.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Telecommunications
Industry published in December 2010. Please see the Credit Policy
page on www.moodys.com for a copy of this methodology.
BT Group Plc, which operates principally through its 100%-owned
subsidiary British Telecommunications Plc, is the leading provider
of local, long-distance and international telecommunications
services in the UK and one of the world's leading providers of communication
solutions and services, operating in 170 countries. In the
year ended 31 March 2014, BT reported revenue of GBP18.3
billion and EBITDA of GBP6.1 billion.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Ivan Palacios
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
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Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
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Moody's affirms BT's Baa2 rating following planned EE acquisition; positive outlook
