S&P has put Vodafone Group's BBB+ debt ratings on Creditwatch negative, suggesting the operator will have difficulty reducing leverage after completing the takeover of Liberty Global's assets in Germany and Eastern Europe. The ratings agency said the deal is likely to receive regulatory approval, and the additional debt will see Vodafone's leverage peak at 3.4-3.5x adjusted EBITDA in fiscal 2020.
While Vodafone has announced measures to conserve cash, such as reducing its dividend, it faces other costs, such as the higher-than-expected price for spectrum in the recent German auction, S&P said. This will more than offset the dividend cut in FY2020. In addition, Vodafone is facing additional 5G spectrum auctions in other markets, including the UK. Although S&P expects these auctions will be "more benign" than the ones in Italy and Germany, they could still prevent meaningful reduction in leverage over the next two years.
Operational difficulties are also expected to persist in markets such as Spain, where Vodafone has lost key football rights, and South Africa, which faces macroeconomic pressure. S&P expects only flat organic revenue growth for Vodafone's European operations in FY2020, reflecting continued weakness in Spain and the remaining fallout from repricing in Italy.
Without any further asset disposals, leverage will only reduce gradually, supported by cost efficiencies. S&P forecasts that adjusted debt to EBITDA will decline to about 3.2x by FY2022, with no reduction to less than 3x in the forecast horizon. The Creditwatch status will be resolved after the Liberty Global deal closes, which is expected in the next three months.
