Verizon Bows to Reality on Its Credit Rating -- WSJ
May 06 2017 - 02:02AM
Dow Jones News
By Drew FitzGerald and Thomas Gryta
Verizon Communications Inc. warned it won't be able to boost its
credit rating as quickly as promised after a major debt ratings
firm gave the company less room for error in a sagging wireless
industry.
In a research note Wednesday, S&P Ratings Services noted
that Verizon is exposed to the mature and highly competitive U.S.
wireless business, the source of 70% of its revenue. As a result,
S&P raised the debt standard that Verizon needs to meet to
improve its credit rating from triple-B-plus.
"We like the long-term potential for the wireless industry but
the near term is very competitive," said Allyn Arden, S&P's
primary analyst for Verizon. "For AT&T and Verizon, it is going
to be hard for them to differentiate on their network alone."
Verizon has long promised investors it would return its debt
ratings to their level before its $130 billion purchase of Vodafone
PLC's minority stake in its wireless business. Only two weeks ago,
Verizon told investors it was still on track.
The massive Vodafone deal was a major bet on the U.S. wireless
market for Verizon, just two years after rival AT&T Inc. was
blocked from pursuing a similar course with its bid to buy T-Mobile
US Inc. AT&T shifted direction and bought satellite broadcaster
DirecTV in 2015, and it is continuing down that path of
diversifying with its agreement in October to acquire media company
Time Warner Inc. for $85 billion. AT&T gets about 45% of its
revenue from wireless service.
Verizon has passed on similar deals, instead focusing on smaller
deals for AOL and Yahoo. The Wall Street Journal in January
reported that Verizon explored a deal with Charter Communications
Inc., showing the company was back on the prowl for large deals;
but executives recently said the talks hadn't progressed.
In a securities filing Friday, Verizon said given S&P's
change of view "we no longer expect to be able to achieve an
upgrade to our pre-Vodafone credit rating" by 2018 or 2019. The
company declined to comment further.
The comments could add to mounting investor pressure on Verizon
to make a big acquisition that eases its dependence on the
cellphone business, analysts said. In the first quarter, Verizon
lost mainstream wireless customers for the first time ever and
reported its total revenue dropped 7.7%.
Verizon shares gained 1.8% on Friday to $46.69, but are still
down 13% year to date.
"Walking away from its pre-Vodafone credit aspirations gives
Verizon greater financial and strategic freedom," said Citigroup
analyst Michael Rollins, noting the company could use debt to
accelerate investment or make acquisitions.
Verizon is scheduled to hold a meeting with Wall Street analysts
on Monday afternoon.
Cellphone companies have faced an especially tough environment
over the past few months as pricing has declined and customers hold
on to their devices longer. Both Verizon and AT&T rolled out
unlimited data plans in the first quarter, moves that hurt
sales.
S&P warned it could also toughen criteria for AT&T were
its proposed takeover of Time Warner to collapse, though S&P
said that is unlikely.
Verizon made waves in the bond market in 2013 with its buyout of
Vodafone's stake. It sold $49 billion of bonds, the largest
corporate debt sale in history at the time. The company had $116.5
billion of debt outstanding at the end of the first quarter.
Verizon's credit ratings sagged under the new debt load, though
it remained in solid investment-grade territory and faced
relatively low borrowing costs. The company at the time pledged to
regain its pre-transaction credit rating of A-minus by steadily
whittling down its leverage.
"By and large, investors took it at face value," Mark Stodden,
an analyst at Moody's Investors Service, said Friday. "The world
changed between when they made that commitment and now."
Write to Drew FitzGerald at andrew.fitzgerald@wsj.com and Thomas
Gryta at thomas.gryta@wsj.com
(END) Dow Jones Newswires
May 06, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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