Moody's Affirms Softbank's Rating; Reviews EAccess for Upgrade
Debt ratings agency, Moody's has affirmed its Baa3 issuer rating on Softbank. The rating outlook remains stable. At the same time, Moody's has placed its Ba3 issuer rating and the senior unsecured rating on review for upgrade.
The affirmation for Softbank and review for eAccess was prompted by a joint announcement on 1 October that they have agreed for eAccess to become a wholly owned consolidated subsidiary of Softbank through an equity exchange.
The transaction is credit neutral for Softbank as the estimated acquisition cost will have a limited impact on its leverage as measured by its adjusted debt-to-EBITDA ratio and adjusted EBITDA margin.
On the other hand, the merger will be positive for the eAccess' rating as the company will benefit from Softbank's greater size, higher adjusted EBITDA margins, and lower financial leverage.
The transaction is expected to close by the end of FYE3/2013, pending approval from eAccess' shareholders and the relevant regulatory authorities.
Softbank is Japan's 3rd largest wireless operator and eAccess is the 4th largest. The combined entity, on a proforma basis, will become the 2nd largest wireless operator with 39.11 million (as of August end 2012) subscribers. Upon completion of the integration, eAccess will delist from the Tokyo Stock Exchange.
The main objective of the integration is to strengthen the competitive strength of the combined entity in the wireless business in Japan, particularly in the growing area of LTE.
The integration is also expected to provide Softbank with business advantages, such as a larger network service and a more efficient operating cost structure. Connectivity will improve as customers will have access to both Softbank's 2.1GHz and 900MHz frequency and eAccess' 1.7GHz spectrum.
As of the end of FY3/2012, Softbank had adjusted JPY2,598.3 billion of gross debt and JPY1,025.3 billion of adjusted EBITDA. By contrast, eAccess had JPY225.8 billion of adjusted gross debt and JPY60.3 billion of adjusted EBITDA. The combined pro-forma debt of both companies will increase Softbank's adjusted debt/EBITDA to 2.60x from 2.53x.
Moody's notes that eAccess generated revenue of JPY204.7 billion and adjusted EBITDA of JPY60.3 billion during FYE3/2012, resulting in an adjusted EBITDA margin of 29.5%. While somewhat below Softbank's adjusted EBITDA margin of 32.0%, its proforma adjusted EBITDA margin remains close to 32%. Moody's considers that operating synergies, when achieved, will provide an opportunity for an improvement in this metric.
The total acquisition cost is estimated at around JPY180 billion, based on a cost per share of JPY52,000 -- a premium of about 2.7x above the closing price on 1 October.
The stable outlook on Softbank's reflects Moody's view that the company will maintain a financial profile appropriate for its current rating over the next few years despite competitive market conditions. Moody's anticipates Softbank's adjusted EBITDA margin at more than 30% in FYE3/2013.
Softbank could face rating upward pressure if it continues to improve its profitability and leverage on a sustained basis, such that its adjusted EBITDA margin stays above 35% and adjusted debt/EBITDA remains below 2.4x.
Another positive for the rating will be a capital structure with a longer average borrowing term than is currently evident to reduce the pressure on internally generated cash flow. In addition, the company will need to demonstrate a trend of continued excellent liquidity and access to the capital markets.
Negative rating pressure could emerge if Softbank's adjusted EBITDA margin falls below 30%, or if adjusted debt/EBITDA deteriorates to greater than 2.75x in FYE3/2013. Any decision to meaningfully reduce capital spending would be reviewed to assess its impact on the company's competitive position. A significant change in its position in the mobile communication market would also lead to negative pressure, as would any significant additional M&As, or share buybacks.