America Movil Vows to Protect Credit Rating in KPN DealCrayton Harrison and Manuel Baigorri
America Movil SAB has a plan in place to ensure its credit rating isn’t lowered because of its offer to take control of Dutch phone company Royal KPN NV, Chief Financial Officer Carlos Garcia-Moreno said in an interview.
Billionaire Carlos Slim’s wireless carrier can fund the transaction even if every single KPN shareholder accepts its offer of 2.40 euros a share, Garcia-Moreno said yesterday. He declined to elaborate on how America Movil would pay as much as 7.2 billion euros ($9.6 billion) without a reduction in its rating, which Moody’s Investors Service said it may lower.
“We’re comfortable,” Garcia-Moreno said. “We’ve always held an interest that whatever we do doesn’t have an impact on our ratings.”
America Movil is pursuing a majority stake in KPN, the largest Dutch phone company of which it now owns 30 percent. That would give America Movil a beachhead in Europe as it seeks to expand beyond Latin America, where it’s the biggest mobile-phone company. The move also threatens to unravel an 8.1 billion-euro cash-and-stock agreement by KPN to sell its German unit, E-Plus, to Telefonica SA, which competes with America Movil in Latin America.
Moody’s said yesterday the KPN offer may force it to cut Mexico City-based America Movil’s rating at least one level from A2, or five levels above non-investment grade.
If all of The Hague-based KPN’s other investors took America Movil’s offer and the company financed the transaction with debt, its ratio of debt to adjusted earnings would rise as high as 2.5, above the 1.5 threshold for an A2 rating, Moody’s said in a statement.
“We have a plan that covers all the scenarios,” whether only 21 percent of KPN shareholders accept the offer or all of them do, Garcia-Moreno said. Once the company begins the tender offer next month, it will have to be open for eight weeks under Dutch regulations, meaning America Movil has three months from now to prepare for various outcomes, he said.
Fitch Ratings said last week the KPN offer puts America Movil’s credit under “modest pressure.” It also rates the company at five levels above junk. Standard & Poor’s rates America Movil at A-, four levels above non-investment grade.
Garcia-Moreno declined to comment on the sale of E-Plus.
KPN and Telefonica didn’t secure America Movil’s backing before the E-Plus transaction was announced July 23. America Movil Chief Executive Officer Daniel Hajj said on a July 26 conference call that the company will decide whether to support the German deal when the terms are presented to shareholders.
Slim is moving on KPN as he seeks leverage to get a higher price for E-Plus or to block the deal, two people familiar with the billionaire’s plans said, asking not to be named as the discussions are confidential. The next step may be renegotiating the terms with Telefonica, one of the people said.
KPN would get 5 billion euros in cash and a 17.6 percent in the entity created from the combination of E-Plus and Telefonica Deutschland Holding AG.
Telefonica’s offer for E-Plus is final, spokeswoman Marisa Navas said Aug. 11. A counterbid for KPN is unlikely because of how that might impact the Madrid-based carrier’s own debt rating, said three people involved with discussions on the Spanish company’s strategy. They asked not to be named because the deliberations are private.
This isn’t the first time Slim, 73, has battled with Cesar Alierta, the 68-year-old Telefonica chief executive officer, over European assets. Alierta thwarted the America Movil chairman’s attempt to buy a stake in Telecom Italia SpA in 2007. Telefonica is now the single biggest investor in Italy’s biggest phone company.
Last year, Alierta failed in blocking Slim from taking a 28 percent stake in KPN. Telefonica and KPN had reached a deal for the Spanish company to buy the stake Slim was after and combine their German businesses, a person familiar with the matter said at the time. Credit-rating companies warned Telefonica that it could be downgraded to junk if it were to take on any more debt, scuttling the talks, the person said.
America Movil rose less than 1 percent to 13.24 pesos at 9:35 a.m. in Mexico City. The shares have dropped 11 percent this year through yesterday. KPN is up 0.3 percent to 2.34 in Amsterdam. It’s risen 26 percent since the German deal’s announcement. Telefonica gained 0.4 percent to 10.95 euros in Madrid, and is up about 6 percent since July 23.
Yields on America Movil dollar bonds rose five basis points, or 0.05 percentage point, to 4.26 percent in New York. They’re up 15 basis points in the past two trading days.
“America Movil cares about its rating,” Garcia-Moreno said. “It has the best ratings in the telecom sector, and we value them a lot. Our internal restriction is, whenever we do a purchase, a big acquisition, to always look at what we have to do so it doesn’t affect our ratings. We have 12 years of track record and we’ve done very big transactions over time. We have an excellent record of ratings.”