Fitch Ratings has affirmed France-based Societe Francaise du Radiotelephone's (SFR) ratings at Issuer Default 'A-' (A minus), senior unsecured 'A-' (A minus) and Short-term 'F2'. The Outlook is Stable.
The ratings reflect SFR's very strong market position as France's second-largest national cellular operator after France Telecom's Orange in terms of overall subscriber base. The ratings also reflect Fitch's expectation that leverage will remain below 1x net debt/EBITDA due to its strong cash generation and conservative financial policy.
"SFR performed well in 2006, considering the set of stringent measures implemented by regulator ARCEP," says Richard Petit, Associate Director in Fitch's European TMT group. "Regulatory activity remains the key factor likely to affect SFR's credit profile over the next 18 months."
Notwithstanding a 24% reduction in mobile termination rates (MTR) with effect from January 2006 and a 19.4% cut in SMS termination rates (followed by a 30% cut in September), SFR was able to stabilise revenues through reasonable customer growth (+4%), solid customer usage growth (+10.5%) and improved customer mix with post-paid subscribers accounting for 65% of total (63.3% in 2005).
Despite a compression in ARPU, SFR's reported EBITDA margin improved to 39.7% in 2006 from 36.9% in 2005, supported by ongoing efforts to manage the cost base, including declining handsets cost.
The Stable Outlook reflects Fitch's expectations that the revenue impact of European and national regulatory initiatives and increasing competition will be compensated by higher customer usage and improved customer mix. Particularly, Fitch does not expect radical decisions from ARCEP on MTR as these rates are already among the lowest in Europe. Also, the impact from the EU's recent decision to cap international wholesale and retail roaming rates on 2007 performance should be limited given the timing of the adoption and international roaming's low contribution to SFR's total revenues.
In October 2006 SFR increased its share in Neuf Cegetel to 40.5% and agreed to buy Tele2's fixed-voice and DSL businesses.
Fitch says that it recognises the defensive rationale of these transactions; SFR secures access to France's second-largest fixed line operator and gains presence in the DSL space as multiple-play offerings gain good customer reception. The Tele2 deal is being investigated by the EU. In addition, SFR launched its own quad-play offering in April, utilising Neuf Cegetel's network.
Although mobile penetration on the French market increased further to 80.8% in 2006, it remains low compared to European peers partly because of its high post-paid nature, leaving headroom for further growth in Fitch's view.
The arrival of MVNOs on the French market fell short of the regulator's expectations, with a dozen of them capturing only 3.42% of the mobile market at March 2007. MVNOs are not expected to materially modify the market dynamics since the regulator has postponed the review of the market until the issue of the fourth 3G licence currently on sale has been resolved.
SFR's liquidity was good at December 2006, with short-term liabilities of EUR1.3bn covered by EUR1.65bn of undrawn bank facilities and on-balance sheet cash of EUR108m. Reported net debt/EBITDA decreased slightly to 0.65x in 2006 from 0.73x in the previous year."
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