PLDT credit rating won't be affected by Digitel buy-in

MANILA, Philippines - Leading global credit watchers Moody’s Investors Service and Fitch Ratings said Philippine Long Distance Telephone Co.’s acquisition of a majority stake in competitor Digital Telecommunications Phils. Inc. (Digitel) will not affect PLDT’s credit rating.

In a statement, Moody’s said despite a “temporary spike in leverage,” PLDT’s buy-in will not significantly impact on its current Baa2 issuer rating and Ba1 foreign currency bond rating.”

Fitch Ratings, in a separate statement, also affirmed the rating on the telecom giant’s long-term foreign currency IDR, its outstanding global bonds and senior notes at BB+, and national long-term rating at AAA. The outlook on both are stable.

PLDT acquired a majority 51.55 percent stake in Digitel, which owns the popular Sun Cellular brand, from Gokongwei-owned parent firm JG Summit Holdings Inc.

The agreed price for the acquisition is P69.2 billion, which could increase to P74.1 billion assuming full acceptance by the minority shareholders of Digitel of PLDT’s tender offer scheduled in May or June this year.

Payment will be settled through the issuance of one new PLDT share worth P2,500. Minority shareholders have the option to receive payment in cash rather than shares, which equates to about $110 million.

“The transaction, which is expected to complete on June 30, 2011, will result in temporary spike in leverage – as measured by consolidated debt/EBITDA – to approximately 1.6x for 2011 given the assumption of some $600 million in debt and potential cash payment to Digitel’s minority shareholders, given that Digitel will only make a six-month contribution to results. PLDT has also previously communicated plans to accelerate capex for 2011 and 2012,” Moody’s vice president and senior credit officer Laura Acres said.

Acres, also Moody’s lead analyst for PLDT, added that given the acquisition and PLDT’s accelerated capex plan, “it is Moody’s expectation that adjusted consolidated debt/EBITDA will remain at 1.5-1.6x for the next 18 to 24 months before falling back to 1.2-1.4x in 2013; as such the acquisition can be accommodated within the current rating level.”

Moody’s said the acquisition will further strengthen PLDT’s presence in the local telecommunications space, giving it an estimated 60 percent wireless market revenue share as well as provide potential costs savings through synergies relating to infrastructure sharing, centralized procurement, and capex rationalization.

Meanwhile, Fitch explained that its rating reflects its positive views on the PLDT acquisition, noting that the combined entity would be the undisputed market leader by a significant margin, claiming around of 70 percent of wireless subscribers, and 66 percent of wireless revenues in the country.

It said PLDT’s long-term local currency IDR will likely be upgraded by one notch once the transaction is completed.

PLDT’s LT LC IDR of BBB (which currently exceeds the sovereign local-currency rating by two notches) ignores foreign-currency transfer and convertibility risk, and is more reflective of its stand-alone credit profile. The company’s FC IDR remains constrained by the Philippines’ country ceiling, which is currently BB+. The national rating of AAA incorporates all the above factors and is indicative of PLDT’s relative credit strength among all Philippine companies.

Fitch said PLDT’s management expects to receive the regulator’s approval despite this transaction resulting in a duopoly market, given their belief that the transaction is not anti-competitive and the industry would soon become a three-player market again with the entry of San Miguel Corp. (SMC).

“Moreover, management believes that the Philippine telcos are also facing competition from “over-the-top” players like social networking sites which are cannibalising the telcos’ high-margin short messaging services (SMS) revenues.”

Fitch also noted that telecom regulatory risk in the Philippines is relatively lower than most other Asia-Pacific countries as evidenced by minimal intervention on tariffs, a low rate of issuing new licenses to create additional competition, and a low frequency of reviewing termination rates.

It cited that another major concern for the Philippine telcos is the pressure on overall operating margins resulting from the changing revenue mix from high-margin SMS, national long distance (NLD) and international long distance (ILD) revenues to relatively lower-margin fixed and wireless broadband services. Fitch said it does not expect the potential acquisition to alleviate this concern and accordingly expects the telcos’ overall margins to remain under pressure on this count.