STC acquisition of Vodafone Egypt credit negative, if debt funded - Moody's

The ratings agency does not expect a deal to close before June 2020

  
The building of Vodafone Egypt Telecommunications Co is seen at the Smart Village in the outskirts of Cairo, Egypt, October 27, 2015. Image for illustrative purposes.

The building of Vodafone Egypt Telecommunications Co is seen at the Smart Village in the outskirts of Cairo, Egypt, October 27, 2015. Image for illustrative purposes.

REUTERS/Asmaa Waguih

Saudi Telecom Company’s (STC) acquisition of Vodafone Egypt would be credit negative if the transaction is fully debt-funded, Moody’s said in a report.

STC signed a non-binding memorandum of understanding (MoU) with Vodafone Group to purchase its 55 percent controlling stake in Vodafone Egypt for $2.39 billion.

The transaction, if fully debt-funded, would increase STC's leverage (debt/EBITDA) to around 1.0x from 0.7x as of year-end 2019, a credit negative because leverage would be high for STC's A1 rating, the ratings agency said in a note.

“The transaction will likely negatively pressure margins that are already pressured because of high costs related to the 5G roll-out in Saudi Arabia (A1 stable),” Moody’s said.

The agency noted however that the transaction will increase the company’s diversification, with pro forma revenue from international operations contributing around 17 percent to total revenue, from 9 percent in 2019.

Moody’s expects pro forma retained cash flow/debt to decrease to 37.3 percent from 52.3 percent at year-end 2019 and pro forma EBITDA margins to decrease to around 48.1 percent from 48.3 percent at year-end 2019.

“The decrease in margins could be partially offset by synergies the company can extract from the transaction, given the proximity of the two countries and the lower labor cost in Egypt compared to Saudi Arabia,” the ratings agency said.

The non-binding deal values Vodafone Egypt at $4.35 billion and will include the use of the Vodafone brand, and a range of other Vodafone services.

Vodafone Egypt is the country’s biggest mobile operator, with a 40 percent market share. Tadawul-listed STC is 70 percent controlled by PIF, Crown Prince Mohammed bin Salman’s main investment vehicle.

Moody’s said it does not expect a deal to close before June 2020. The MoU is non-binding and effective for 75 days and can be extended by mutual agreement.

During the 75-day (or longer) period, STC will conduct due diligence and negotiate definitive agreement terms with Vodafone, after which, it must obtain regulatory approvals for the acquisition.

Telecom Egypt said in a statement today that it is in the process of appointing an investment bank(s) to study options and consequences of the potential transaction’s possible investment options and opportunities.

The company’s statement reiterated that all options are still being considered and studied, and that its main goal is to ensure that its shareholders gain the maximum benefit out of the opportunities currently presented.

(Writing by Gerard Aoun; editing by Seban Scaria)

(gerard.aoun@refinitiv.com)

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© ZAWYA 2020

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