Vodafone Said to Be Ready to Accept Lower Debt Rating on M&A

Vodafone Group Plc told investors it’s willing to accept a lower debt rating in the event the wireless carrier pursues a takeover, according to a summary of a meeting held yesterday.

Chief Financial Officer Andy Halford, speaking at a conference organized by Citigroup Inc., said the world’s second-largest mobile-phone company would take a BBB+ rating, the third-lowest investment grade and one step below the company’s A- ranking by Standard & Poor’s, should an opportunity to make an acquisition arise, according to a copy of the note obtained by Bloomberg News.

Vodafone’s readiness to accept a lower rating -- which may result from taking on additional debt -- means the company isn’t under pressure to sell its 45 percent stake in U.S. venture Verizon Wireless, Citigroup said in the note. The amount of debt required to move to BBB+ may be 7 billion pounds ($10.6 billion) or more and could finance a bid for Germany’s Kabel Deutschland Holding AG, as Vodafone expands its fixed-line presence, said Robin Bienenstock, an analyst at Sanford C. Bernstein.

“They’re just making it clear that they could buy without necessarily being a forced seller of Verizon Wireless, which is a very rational thing to do,” London-based Bienenstock said in an interview. “The problem is, how much of your footprint is really going to be fixed by going to find solutions with acquisitions of up to 9 or 10 billion pounds? The answer is, not very much.”

Bundled Packages

Simon Gordon, a spokesman for Newbury, England-based Vodafone, declined to comment because the event was private.

Chief Executive Officer Vittorio Colao said last month he’d be interested in expanding combined offers of voice, Internet and mobile services across Europe. The company is looking for ways to make its network more efficient as service revenue from wireless customers slips.

The carrier put its plans to approach Kabel Deutschland, valued by the market at 6.2 billion euros ($8 billion), on hold after leaks of a potential offer, people familiar with the matter said last month.

Vodafone fell 0.7 percent to 186.30 pence at 12:30 p.m. in London trading. The stock had gained 21 percent this year through yesterday. Kabel Deutschland, Germany’s largest cable provider, rose 1.1 percent to 70.24 euros in Frankfurt.

Dividend Policy

Credit-default swaps insuring Vodafone’s bonds have fallen about 8 percent since Bloomberg reported Feb. 27 that Vodafone had put its Kabel Deutschland plans on hold. They climbed 1.5 percent today to 83 basis points.

The derivatives pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.

Vodafone’s 4.65 percent euro-denominated bond due 2022 fell 0.4 percent to 119.68 cents on the euro. The yield climbed 2.5 percent to 2.17 percent from 2.12 percent.

The company’s board will probably consider all sources of cash flow, including cash from Verizon Wireless, when setting its dividend policy, the note from the investor meeting showed. The company received more than $8 billion from its U.S. wireless stake last year, though the payments are irregular.

Verizon Communications Inc., which owns the other 55 percent of Verizon Wireless, is working to resolve its relationship with Vodafone this year after weighing options that range from buying Vodafone’s stake to a full merger of the two companies, people familiar with the situation said this month. Vodafone’s portion of the venture may be worth $115 billion, according to analysts.

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