Ratings agency Fitch has said that Vodafone could face a downgrade if it acquires German cable firm Kabel Deutschland. An approach to Kabel was confirmed by Vodafone this morning.
The potential transaction would increase FFO adjusted net leverage to above 2.5x (2.4x at end March 2013), which we see as a key threshold for Vodafone's 'A-'/Stable rating. Acquiring KD, which generated EUR848m of adjusted EBITDA in the twelve months to December 2012, could cost Vodafone about EUR10bn on a debt-free basis. Vodafone could take a number of steps to offset this possible deterioration in credit metrics, including selling some, or all, of its stake in Verizon Wireless. We would expect to hold a rating committee if Vodafone announced an offer to buy KD or a similar European operator.
Nomura's equity research team:
Even though Vodafone’s interest in KDG has strategic merits, the price it is likely to pay will be expensive and will attract criticism given that Vodafone looked at the asset closely ahead of its IPO in 2008 when the equity was priced more than three times cheaper. Given Vodafone’s track record for value-destructive M&A (albeit under previous management), shareholders are likely to be concerned about future intentions.