PLDT Acquisition of San Miguel's Telecoms Business is Credit Negative 

Moody's Investors Service says that Philippine Long Distance Telephone Company's acquisition of San Miguel's telecommunication business is credit negative as this partially debt financed acquisition will cause its leverage to rise into the 2.5x range by year end, which is at the upper end of leverage tolerance for its Baa2 issuer rating.

Moreover, this comes at the time when PLDT's operating performance is under pressure.
On 30 May, PLDT announced acquisition of the entire equity interest in Vega Telecom (which holds San Miguel's telecommunications assets through several subsidiaries) on a joint basis with Globe Telecom for PHP69.1 billion, which includes the assumption of PHP17.0 billion in liabilities.

At the same time, PLDT and Globe will also jointly acquire the entire share capital of New Century Telecoms and eTelco, both of which separately hold additional spectrum through their respective subsidiaries, for an aggregate PHP0.9 billion, which includes the assumption of PHP0.2 billion in liabilities.

The total consideration for these three acquisitions is PHP70 billion, including the PHP17 billion in assumed liabilities. As a result, for its 50% equity portion, PLDT will pay a total of PHP35 billion, comprised of a PHP26 billion cash payment and PHP9 billion of assumed liabilities.

"These transactions provide PLDT with new spectrum frequencies -- notably in the 700 MHz, 900MHz and 1800Mhz bands, which will help improve its network quality and rollout in regional and rural areas; however, the company's financial metrics will likely deteriorate, as part of the purchase price and additional capex will be debt financed," says Annalisa Di Chiara, a Moody's Vice President and Senior Credit Officer.

The cash inflows from the sale of 25% of its equity interest in Beacon Electric Asset Holdings to Metro Pacific Investments , will help mitigate the increase debt levels and support cash flows, which Moody's says it views positively.

MPIC has agreed to pay PLDT PHP26.2 billion in total for the Beacon stake; PHP17.0 billion will be received at closing while the remaining PHP9.2 billion will be paid in over the next four years.
PLDT's first payment of PHP 13.2 billion (representing its 50% share of the purchase price of the equity), was paid in cash on 30 May. The second payment of PHP 6.6 billion (representing 25% of the purchase price) will be due on 1 December 2016 and the remaining balance of 25% due on 30 May 2017.

Additionally, the company announced its intention to raise capex by about USD100 million (PHP5 billion) in 2016 to PHP48 billion as it looks to accelerate the rollout of its service in the newly acquired 700 MHz, 900Mhz and 1800Mhz bands.

Moody's will continue to evaluate the effect these acquisitions and capex plan will have on the company's operating profile, particularly as related to any revenue and cost synergies, operating expenses, and debt levels. Moody's will also consider any valuation adjustments to the purchase price which may occur following PLDT's post-closing due diligence process over the next 60 days.

PLDT's rating may come under downward pressure if (1) adjusted debt/EBITDA remains in the 2.5x range; (2) adjusted EBITDA margin falls below 40%; or (3) retained cash flow/debt declines to below 20%, as a result of the announced acquisitions and/or continued weak operating performance.

Given the company is at the upper tolerance range of its rating trigger, positive rating action over the next 12 months is unlikely. However, PLDT's rating could come under positive pressure if the company (1) maintains adjusted consolidated EBITDA margins that exceed 45%; (2) lowers adjusted consolidated debt/EBITDA to below 1.5x on a sustained basis; (3) increases retained cash flow/debt to above 30%; and (4) ensures that shareholder returns and asset investment policies do not substantially weaken its financial profile.
Philippine Long Distance Telephone Company is the largest telecommunications operator in the Philippines. It is an integrated provider of fixed-line, broadband, cellular, and information and communications technology.

Source: Cellular News