January 27 (SeeNews) - Standard & Poor's said it has affirmed its 'B' issuer credit rating of Southeast Europe-focused telecoms and media company United Group with stable outlook.
Last year, United Group agreed to acquire Bulgarian Telecommunications Company (BTC), operating under the Vivacom brand, for 1.2 billion euro ($1.3 billion). In January, the company also signed a deal to acquire Tele2 Croatia for 220 million euro. Both deals are pending regulatory approval.
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"The outlook is stable because we expect that United Group will continue to benefit from strong organic revenue growth of more than 5% and successfully integrate Tele2 Croatia and Vivacom, helping it reduce adjusted leverage to less than 7.0x by 2021-2022, with funds from operations (FFO) cash interest coverage staying above 3.0x over 2020-2021," S&P said in a statement last week.
S&P has also assigned a 'B' issue rating to United Group's proposed senior secured notes and 'B-' issue rating to the proposed payment-in-kind (PIK) notes, through which the group plans to finance its acquisition of BTC.
United Group is issuing 1.795 billion euro of notes in a bid to carry out a fully-debt funded acquisition of BTC, as well as refinance its outstanding senior secured notes.
"We think Vivacom will enhance United Group's business because it is highly profitable and has well invested network assets that will considerably increase United Group's scale and geographic diversification," S&P said adding "Nevertheless, the fully debt-funded acquisition will delay United Group's deleveraging prospects and over the medium term."
S&P also said in its statement:
"Vivacom and Tele2Croatia will double United Group's scale and scope but country-related risks remain a key constraint on operations. In November 2019, United Group announced its proposed acquisition of Vivacom, the largest integrated telecom operator in Bulgaria. United Group expects to pay €1.2 billion, and management expects the acquisition will close during the second quarter of 2020. Earlier this year, United Group announced the acquisition of Tele2 Croatia for €220 million, for which it is awaiting approval from the antitrust authorities. If these two transactions close as planned, we estimate that Vivacom's pro forma revenues for 2019 will double to just below €1.5 billion, and its reported EBITDA will be 85%-90% higher. Moreover, United Group's mobile operations will increase substantially. In our view, the addition of Vivacom not only enhances the group's scale and geographic exposure, but adds an attractive asset that benefits from an incumbent position in Bulgaria, fully owned and well-invested fixed and mobile networks, and a solid growth profile despite the high uptake of telecom services in Bulgaria. The benefits of these acquisitions will be somewhat offset by some margin dilution and higher exposure to mobile operations, which tend to be more volatile than fixed broadband. Furthermore, both acquisitions are unlikely to create any imminent substantial synergies with United Group's existing assets. The operations will remain constrained by elevated country risks, including higher price sensitivity than in wealthier markets, exposure to piracy, and grey market activities.
We expect somewhat delayed deleveraging after the acquisition of Vivacom. The acquisition of Vivacom will be fully debt funded. Pro forma the acquisitions of Vivacom and Tele2 Croatia, United Group's adjusted leverage is about 7.2x, according to our estimates. We understand that United Group's free operating cash flow (FOCF) generation will be constrained by increasing capex as Vivacom steps up fiber investments and by upcoming spectrum auctions mainly related to United Group's assets in Slovenia. As a result, we expect that United Group's deleveraging capacity would be somewhat delayed compared with our previous base case.
Vivacom's former shareholders' dispute creates a material event risk. Vivacom is currently the subject of several litigations between its former and current shareholders and with the Bulgarian Confiscation Commission (BCC). The latter relates to the insolvency of Bulgarian Corporate and Commercial Bank AD, which funded the purchase of Vivacom by a former shareholder. The BCC's claims are secured by shares of certain companies in the Vivacom group. The termination and final settlement of the BCC's claims against the Vivacom Group and release of the shares in the Vivacom companies are conditions to closing. We also consider the ongoing case in a Luxembourg court between Vivacom's former and current shareholders. This case relates to the transfer of ownership of Vivacom's holding company through an enforcement procedure in 2016. We understand the matter was resolved in a London court in 2019 in favor of the current shareholder, but was subsequently reinitiated in Luxembourg. Nevertheless, any material delay exposes United Group to a cash flow shortfall because it is prefunding its acquisition of Vivacom and will need to fund ongoing interest payments. We treat this as an unlikely event risk that could nevertheless create rating downside.
The stable outlook reflects our view that that United Group will continue to benefit from strong organic revenue growth of more than 5% and successfully integrate Tele2 Croatia and Vivacom, helping it reduce adjusted leverage to less than 7.0x by 2021-2022. We forecast funds FFO cash interest coverage will exceed 3.0x over 2020-2021.
We could lower our ratings if we expect adjusted leverage to remain above 7.5x from 2020, if FFO cash interest declines to less than 2.5x, or if underperformance leads to sustained significant negative FOCF that is not offset by strong commercial success. We could also lower the rating if we view liquidity as less than adequate, for example, if the group draws a very significant amount from its revolving credit facility (RCF). This could happen if the closing of the Vivacom acquisition is delayed beyond the second quarter of 2020.
We are unlikely to raise the rating over the next 12-24 months because we do not anticipate any significant and sustainable reduction in leverage under United Group's financial sponsor ownership. Additionally, the rating will likely remain constrained by the group's limited FOCF generation prospects due to its ambitious growth plans, which we anticipate will result in continued high capex and bolt-on acquisitions."
($ = 0.90721 euro)