Telco assets purchase ‘credit negative’ for PLDT

Telco giant Philippine Long Distance Telephone Co. (PLDT) is facing better industry prospects with its acquisition of half of San Miguel Corp.’s telecommunications unit but this could come at the cost of its financial health, Moody’s Investors Service said Wednesday.

PLDT and Globe announced this week the joint acquisition of SMC’s Vega Telecom Inc., whose business units hold valuable radio frequencies but have limited to no operations. The deal was valued at P69.1 billion, including P17 billion in assumed liabilities. Both incumbent telco players will also buy two more companies linked to SMC, causing the deal size to increase to P70 billion.

Moody’s said the transaction, which will be partially funded by debt, was “credit negative” for PLDT and would cause leverage to rise into the 2.5 times range by year’s end. It said this was at the upper end of leverage tolerance for its Baa2 issuer rating.

Moody’s also noted that PLDT’s operating performance was already  “under pressure” at this time.

It said PLDT’s rating could come under “downward pressure” if adjusted debt/Ebitda stayed at 2.5 times, Ebidta margin fell below 40 percent and retained cash flow/debt declined to below 20 percent.

“Given the company is at the upper tolerance range of its rating trigger, positive rating action over the next 12 months is unlikely,” Moody’s said.

“These transactions provide PLDT with new spectrum frequencies—notably in the 700 MHz, 900MHz and 1800Mhz bands, which will help improve its network quality and rollout in regional and rural areas,” Annalisa Di Chiara, Moody’s vice president and senior credit officer, said in the same statement.

“However, the company’s financial metrics will likely deteriorate, as part of the purchase price and additional capex will be debt financed,” she said.

PLDT chair and CEO Manuel V. Pangilinan said in a briefing on Monday that PLDT would tap the debt markets to finance its share of the acquisition over the next six to 12 months.

For its 50-percent equity portion, PLDT will pay a total of P35 billion, comprised of a P26-billion cash payment and P9 billion of assumed liabilities.

Pangilinan said the plan was for PLDT to eventually sell its entire stake in Manila Electric Co., held through unit Beacon Electric Asset Holdings Inc., a venture with affiliate Metro Pacific Investments Corp. On Monday, PLDT said it sold 25 percent of its equity interest in Beacon to Metro Pacific. It still owns another 25 percent.

Moody’s said the sale would help mitigate the increased debt levels and support cash flow, adding this was “positive” for PLDT.