Meralco buy-in prompts Fitch to cut PLDT's rating outlook

MANILA, Philippines - Fitch cut its rating outlook for the Philippine Long Distance Telephone Co. (PLDT) to negative from stable after it agreed to acquire a 20 percent stake in Manila Electric Co. (Meralco), the country’s largest electric distributor. The acquisition, amounting to P20 billion in cash, represents 40 percent of PLDT’s pre-dividend free cash flow (FCF), Fitch said in a statement. Fitch’s negative outlook on PLDT’s local currency rating “reflects limited headroom for a further increase in net leverage," the ratings firm said in a statement. “The agency maintains a cautious view with respect to Meralco's weak financial position and the potential financial support that it may require," Fitch added. At the same time, it affirmed the company’s long-term foreign currency Issuer Default Rating (IDR) and outstanding global bonds and senior notes at ‘BB+.’ The rating indicates that PLDT remains constrained by the country ceiling of the Republic of the Philippines, which is currently 'BB+'. Meanwhile, the company’s National Long-term rating was at ‘AAA(phl),’ representing PLDT’s relative credit strength among all Philippine companies, the ratings firm said. Fitch has also affirmed PLDT's Long-term local currency (LC) IDR at ‘BBB’/Stable, which exceeds the sovereign local currency rating by two notches. The rating ignores foreign currency transfer and convertibility risk, and is more reflective of its stand-alone credit profile, Fitch said. Next: Synergies from Meralco deal “will take time to deliver value," Fitch says Synergies from Meralco deal “will take time to deliver value," Fitch says “Potential telecom synergies arising from [PLDT’s] acquisition include provision of broadband over electricity lines, power-poles to serve last-mile requirements, access to Meralco’s rights of way, and access to the fiber optic network of eMeralco Ventures Inc. (eMVI)," the ratings firm said. eMVI is a Meralco subsidiary that provides data services over a 1000-kilometer fiber optic network. Although the ratings firm recognized the “inherent synergies" resulting from the transaction, Fitch nevertheless said that benefits may be “moderate" and “will take time to deliver value." “The agency views the transaction primarily as a tactical move in light of San Miguel Corporation's (SMC) planned entry into telecommunications, in partnership with Qatar Telecom. With an estimated stake of 27 percent, SMC is a major shareholder of Meralco, and expects to leverage Meralco's infrastructure to offer telecom services," Fitch said in a statement. The proposed acquisition will not impact cash-dividend payouts in 2009 and the group remains committed to its share buyback program for about 3 million common shares in 2009/10, Fitch said. “On aggregate, the acquisition of an effective 30.17 percent stake in Meralco can be accommodated within PLDT's local currency rating of 'BBB', with net adjusted leverage for FY09 expected to remain below the maximum threshold of 1.0x set by the agency," said Priya Gupta, director in Fitch's Asia-Pacific telecommunications, media and technology team. - GMANews.TV