In a Verizon-Charter Deal, Analysts See One Massive Pile of DebtBy
Merger would create the world’s biggest corporate borrower
‘You’re getting into very big numbers,’ BI analyst says
But many in the finance world are focused on another superlative a Charter tie-up could lead to: the world’s biggest corporate debtor. And that’s causing some credit analysts to wonder how Verizon could finance such a massive deal, while also achieving its goal of reducing debt, let alone avoiding a blow to its credit metrics that could jeopardize its investment-grade rating.
“You’re getting into very big numbers,” Stephen Flynn, a Bloomberg Intelligence analyst, said. “It’s not an insurmountable challenge, but it would be in stark contrast to their stated goal to reduce leverage as well as having an effect on its bond prices and ratings.”
Verizon’s Chief Executive Officer Lowell McAdam approached the CEO of Liberty Broadband, Charter’s largest shareholder, about a possible combination, people familiar with the matter said on Thursday. Verizon hasn’t directly approached Charter, and there are no talks between the two companies. There may never be.
Bob Varettoni, a spokesman for Verizon in New York, and Justin Venech, a representative for Stamford, Connecticut-based Charter, declined to comment.
Already one of the biggest corporate bond borrowers globally, Verizon would have to take on even more debt to make the merger happen. Verizon had less than $3 billion of cash on its books as of the end of last year, but would need far more than that to buy Charter, whose value in the stock market is around $103 billion now.
Borrowing more could be difficult for both Charter and Verizon because of the large amounts of debt on their books, said Bloomberg Intelligence’s Flynn. Verizon has around $116 billion of debt as of the end of 2016, according to a company presentation. Add on Charter’s debt and additional borrowings to fund this purchase, and the figure could approach $200 billion, he said.
That could make the combined entity the most indebted non-financial company globally, ahead of AT&T Inc. even as it agreed a $40 billion loan to buy Time Warner Inc., and ahead of Anheuser-Busch InBev NV, according to data compiled by Bloomberg.
On Friday, Verizon bondholders were pressing for more protections in a proposed $29 billion debt swap that was launched earlier in the week, people with knowledge of the situation said. The investors are seeking to add terms to the new debt they would swap into, such as a step-up coupon in case of a Charter deal, they said. That provision would allow investors to earn higher interest if the company’s credit ratings are cut after an acquisition.
On Tuesday, Verizon’s chief financial officer discussed his ambitions to improve the company’s credit ratings. It is seeking to win back the credit rating profile it had before its purchase of Vodafone Group Plc’s stake in Verizon Wireless, by 2018 or 2019, said CFO Matt Ellis. It currently has a BBB+ rating from S&P Global Ratings and a Baa1 rating from Moody’s Investors Service, the third lowest investment grade level at each.
Verizon has been willing to make big debt-funded purchases before. It sold a record $49 billion of bonds in 2013 to help finance its 2014 purchase of Vodafone’s interest in Verizon Wireless.
In this case, “the market is going to require much higher interest because the riskiness of the company will have increased substantially,” Dave Novosel, a bond analyst at Gimme Credit, said. “They will have to pay up significantly versus where they are now.”
A combination of Verizon and Charter would follow several recent industry mega-mergers, including Charter’s acquisition of Time Warner Cable and Bright House Networks, as cable and wireless companies explore closer ties to combat slowing revenue growth.
— With assistance by Gerry Smith, Scott Moritz, and Claire Boston