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S&P prepares to downgrade Vodafone after spending spree

Vodafone

Standard & Poor’s has suggested it will downgrade Vodafone from its current ‘BBB+’ credit rating should the European Commission approve its acquisition of Liberty Global assets.

Vodafone has struck an agreement to buy Liberty Global’s operations in Germany, the Czech Republic, Hungary and Romania for €18.4 billion, including debt, though S&P believe this acquisition could put it in a slightly precarious position. With S&P suggesting approval for the transaction could be granted during the next three months, the firm has placed Vodafone on its Creditwatch list.

This acquisition is not the only factor S&P has taken into account, but it seems it will be straw heavy-enough to break the camels back. Aside from this purchase, the financial services firm has also pointed towards spectrum auctions and operational challenges in Spain, weaknesses in South Africa and the re-pricing saga in Italy as contributing factors. India has not been mentioned by the firm, but the on-going difficulties here should also be noted.

In short, S&P believes the firm might be getting a little bit too carefree with its spending.

The Creditwatch function of S&P effectively informs investors of the firm’s closer inspection of a business which is under-going some sort of change. Inclusion on the list can either be positive or negative, indicating whether the credit rating has the potential to go up or down, and in this case S&P feel Vodafone is heading in the wrong direction.

This is all very complicated, and unless you have an avid follower of spreadsheets, there is a blur of numbers and multiples to get your head around. However, this is not good news for Vodafone and will create a negative perception around the business when engaging investors.

Currently, Vodafone’s credit rating is ‘BBB+’, which isn’t necessarily the worst position to be in. A ‘BBB’ rating, any one of the three measurements included, suggests a company ‘has adequate capacity to meet its financial commitments’, though adverse market conditions could impact its ability to meet financial demands. Cutting through the noise, Vodafone has too much debt and poor performance could put it in financial strife; its spending too much money according to S&P.

Looking at the state-of-play for Vodafone, it could be better. There are of course markets where the trends are heading in the right direction, see the UK, but quite a few where it is facing challenges. These trends combined with financial outlay is not painting the prettiest pictures.

The acquisition of some Liberty Global European assets is a big commitment, while the business has also had to fork out €1.9 billion during the German spectrum auction. The Spanish and Italian auctions were also expensive for the telco, while there is another on the horizon in the UK. This is not the time exposure to spectrum auctions has been highlighted at Vodafone, RBC Capital Markets put out its own negative outlook in January.

That said, spending is not an issue if everything is going well. However, macroeconomic weakness in South Africa is decreasing consumer spending on mobile contracts. Considering this is largely a pre-paid market, this should be seen as a worrying trend. Iliad is continuing to cause chaos with aggressive pricing strategies in Italy and Spain is another operational difficulty after losing the rights for domestic football, hitting TV subs hard. As mentioned before, India has not been mentioned by S&P, but it appears the worst damage is in the past following the merger with Idea Cellular.

Vodafone has of course made effects to limit the negative impact. Dividends have been cut and cost-efficiency strategies have been set into motion, while integration costs of the Liberty Global acquisition should be offset by operational synergies. This is not to say Vodafone is going under at any point in the future, but it is a consideration creditors will have to take into account.

This is not the worst news Vodafone could have expected to hear, S&P has said it does not expect to downgrade the credit rating of the firm further, but it is far from good news. It is a slight dent to confidence in the business.


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