Fitch Affirms TeliaSonera at 'A-'; Outlook Stable
Published on: 5th Jul 2014
Fitch Ratings has affirmed TeliaSonera's Long term debt ratings at 'A ' with a Stable Outlook.
Fitch said that TeliaSonera continues to benefit from a well-diversified business portfolio, strong cash flow, sound market position in most of its territories, and low financial leverage relative to the European incumbent peer group - most of which are rated at least one notch lower. FX volatility and the growing maturity of some of its Eurasian markets - notably Kazakhstan, its single largest business in the region - are expected to continue to dampen top-line growth. The company is guiding to flat year-on-year 2014 revenue in local currency terms, while the depreciation of a number of Eurasian currencies could, in Fitch's view, lead to a modest revenue contraction in SEK terms.
Regulatory and governance pressures are present - again mainly concentrated in the Eurasian businesses - while its European businesses are mature and facing high competitive pressures. M&A risk is, in Fitch view, present and higher than in the past, with potential for deals in either Spain or Norway, given the sub-scale position held in these markets. TeliaSonera nonetheless is strongly cash generative and, with net debt/EBITDA of 1.7x at FYE13 has rating headroom to a downgrade guideline of 2.0x.
Competition in Mature Nordics
TeliaSonera's domestic markets are mature and competitive. Competition in Sweden, a market accounting for 40% of group EBITDA (LTM 1Q14), is highly developed in both fixed and mobile while market-wide trends suggest top-line growth will be increasingly challenging to achieve. TeliaSonera's market position is strong however, helped in the fixed consumer segment by a progressive approach to fibre and a competitive TV offer.
Enterprise, accounting for roughly half of TeliaSonera's fixed revenues in Sweden, remains under pressure however, with competition for public sector contracts creating pricing tension and weighing on overall fixed revenues; 1Q14 LTM revenues in this division were down 4%.
Nordic telecom markets are some of the most progressive in Europe with consumers used to high service quality and competitive pricing. These trends are unlikely to ease.
High Quality Eurasian Portfolio
The diversity and market position held by TeliaSonera in it Eurasian operations is impressive. It holds the number one or two positions in these markets covering a population of close to 110 million, a number of which remain under penetrated and which therefore continue to offer strong growth prospects.
Revenue growth in local currencies remains positive, albeit has slowed in markets such as Kazakhstan, and an aggregate EBITDA margin above 50% is strong and positive for the overall group margin. Presence in these markets, nevertheless, gives rise to governance and regulatory pressures, although the diversity of the portfolio provides some mitigation against shocks in any given market.
Higher M&A Risk
Recent comments from management suggest that M&A risk is more present than in the past, with both Spain and Norway seen as markets where the company's position is sub-scale and where acquisitions maybe considered. Previous attempts to divest its Spanish business were unsuccessful, and management has stated that a 7% market share is unsustainable.
The current push for market share in Spain and continued commitment to handset subsidies is diluting what was already a weak margin and will continue to impact financial performance in this market. A market number four position is an anomaly in a portfolio where TeliaSonera is typically the market number one or two. As a result M&A is a risk that could weaken leverage to the extent that ratings would come under pressure.
TeliaSonera benefits from a highly diversified portfolio; its traditional Nordic operations are complemented by some well-positioned Baltic businesses and a Eurasian portfolio accounting for approximately 30% of group EBITDA. The latter in particular gives rise to a high degree of FX exposure, with recent volatility in emerging market currencies having a dampening effect on the growth otherwise delivered by these markets. Fitch's rating case assumes that markets such as Uzbekistan and Nepal will continue to post solid underlying local currency growth but that in the near term at least translation effects will drive volatility and, in some cases, negate this growth in SEK terms. With exchange rates likely to continue to be affected by policy decisions adopted by central banks in many developed world economies, FX and the mismatch associated with debt denominated in developed market currencies, is likely to remain a rating pressure.