Fitch Assigns A Rating to BellSouth Debt Offering19 December 2004
BellSouth's rating reflects the positive effect of the increased presence of wireless in BellSouth's revenue mix, continued growth of the high-speed data and long distance businesses, and BellSouth's strong cash flows. Offsets to the foregoing positive factors are the increased leverage resulting from the financing provided to Cingular, the challenges Cingular will face in integrating AT&T Wireless into its operations and the longer-term uncertainties posed by increased wireline competition from voice over Internet protocol (VoIP) operators.
Key to the Stable Rating Outlook is the important role wireless will play in BellSouth's revenue mix. After the close of the transaction, about 40% of BellSouth's revenues are expected to come from wireless services. Over time, the proportion of wireless is expected to grow, along with continued growth in the wireline side for high-speed data and long distance services, and increased penetration of the large enterprise market. Such growth is expected to offset the erosion in the consumer market caused by the roll-out of voice over Internet protocol (VoIP) telephony services by cable operators, continued wireless erosion, and competition in the business services segment.
BellSouth's leverage has increased as a result of the financing required for Cingular's acquisition of AT&T Wireless as well as consideration for BellSouth's proportionate share (40%) of Cingular's external debt going forward. Fitch estimates BellSouth's leverage will approximate 1.9 times (x) at the end of 2005, including Cingular's proportionate debt and EBITDA. Moreover, while Fitch believes BellSouth will reduce debt over time, competing alternative uses for cash in the form of dividend growth and share repurchases are likely to moderate the pace of debt reduction.
Cingular's acquisition of AT&T Wireless is a strategic positive move for Cingular and its parent companies as Fitch believes wireless continues to have good growth prospects and should maintain stable margins, particularly as growth slows. However, near term challenges exist for Cingular. In addition to the financial risk posed by the financing of the transaction, Fitch believes there will be execution risk in the integration of the two companies and there is some uncertainty regarding the ultimate level and/or timing of operating and capital synergies. Operationally, both Cingular and AT&T Wireless have suffered churn levels at the high end of the industry range over the past year, in part due to network quality issues stemming from the migration from TDMA to GSM technology deployments.
Source: Business Wire
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