Fitch Affirms TeliaSonera at 'A-'; Outlook Stable
TLSN's ratings are supported by its strong operating profile, as evidenced by leading market positions in most of its geographic markets, broad diversification and strong financial metrics relative to its peer group. This diversification gives rise to a certain level of volatility, operational risk, emerging market exposure and FX risk. However, the breadth of operations and strength of its Nordics business moderates its risk profile.
Regulatory and governance pressures remain, mainly concentrated in the Eurasian businesses, while its European businesses are mature and market competitive. A weak Swedish krona is benefiting results, to some extent masking volatility in parts of the portfolio, as has the receipt of SEK4.7bn in Turkcell dividends. Funds from operations (FFO) adjusted net leverage is expected to remain below a downgrade threshold of 2.5x; our base case forecasts a metric trending towards 2.4x in 2016, offering only limited headroom.
KEY RATING DRIVERS
Solid Nordic Business
TLSN holds strong market positions across the Nordics. In Sweden it is the incumbent telecom and market number one in both fixed and mobile. It holds strong number two positions in Finland (fixed and mobile) and Norway (mobile), with increased scale in the latter following the acquisition of Tele2 Norway (cash acquisition for SEK4.5Bn). Sweden is the largest cash flow driver, accounting for 39% of consolidated 2014 EBITDA. TLSN's operating trends are strong relative to the maturity and competitiveness of this market, with average revenues per user growing in both fixed and mobile and overall revenues improving to the low single digits. The integration of Tele2 Norway is ahead of plan and management has recently increased target run-rate synergies to SEK1.0bn (from SEK700m), to be achieved by 2016.
TLSN's portfolio of Eurasian assets consists of market-leading high margin businesses, which have traditionally provided good underlying growth. However, these businesses can be volatile with the potential for disruptive market competition, regulatory, governance and cash repatriation pressures, and exposure to weakness in the macro-environment. Intense competition in Kazakhstan, for instance, which is the company's single largest Eurasian market (11.3% of 2014 consolidated EBITDA), over the past several quarters, has resulted in revenue contraction (1H15 revenues down 8.6%) and margin pressure.
Its Uzbek operations are performing well with 1H15 revenue growth of 10.3% and margins consistently above 50%. The entrance of a fourth player to this market this year could prove disruptive over the medium term, while regulatory investigations into corruption and governance concerns (allegations of bribery) and cash repatriation issues affect this business.
Corporate Governance Risk
Corporate governance risks are long standing, and in Fitch's view will remain a focus for regulators and media agencies. With emerging market Eurasian operations accounting for 31% of 2014 EBITDA, these risks form part of the company's risk profile. In Uzbekistan for instance, corruption allegations have been made over the award of telecom licenses and in Azerbaijan investigators continue to look into the privatisation of Azercell in 2008. In relation to Azercell a SEK6.8bn provision was reported at YE14, valuing a put option in place with minorities allowing them to put their stake indirectly to TLSN in the event of irreconcilable shareholder disagreement. Fitch does not currently treat the value of the put within leverage calculations. As currently valued it would though add roughly 0.2x to FFO adjusted net leverage and take leverage above the downgrade guideline of 2.5x. Exercise of the put is not reflected in the rating and would be treated as event risk.
FX Helpful But Exogenous
FX volatility has been a top-line pressure in the past, with organic growth in the Eurasian businesses often eroded on a reported basis due to local currency devaluation. More recent Swedish krona weakness has helped reported numbers; particularly in relation to the euro, which is the company's single largest currency region. This weakness has also helped dissipate organic weakness in some Eurasian markets in 1H15 albeit these trends might not last. Although FX can at times help reported results, Fitch views this as a factor outside management's control, with organic trends considered the more important operational performance measure. However, as Eurasian currencies are more likely to devalue given the macroeconomic environment, currency exposure is a risk factor.
Debt is raised primarily in non-SEK currencies (Fitch estimates around 87% of debt). Leverage measures may not necessarily therefore be helped by SEK weakness once debt increases due to FX are taken into account, although the reported impact was neutral in 1H15.
M&A Risk Moderates
Following the closing of the Tele2 Norway acquisition in February 2015 and given recent consolidation in the Spanish market (ONO and Jazztel both having been sold) Fitch believes M&A risk has moderated. Nonetheless, Spain remains a sub-scale business where Yoigo's 7% market share and number four position set it apart from the leading position TLSN's businesses tend to otherwise occupy. Fitch believes that management will continue to look for a long-term solution for Spain. Acquisition opportunities seem limited, and in our view a disposal is more likely over the medium term.
Portfolio focus has perhaps shifted to the Eurasian businesses, given the risks and volatility in of some of these markets. In Fitch's view, certain countries could start to be viewed as less strategic given management's comments around the risk associated with the portfolio. In the event of disposals, management's use of the proceeds is important, and could potentially be positive for the rating, improving financial flexibility, removing some emerging market volatility and improving ratings headroom.
Improved Associate Dividend Visibility
A long-running shareholder impasse over dividend payments at Turkcell (38% owned by TLSN) appears to have been resolved with a special dividend covering 2010-2014 being made in May 2015 and TLSN receiving SEK4.7bn net of tax. The payment is important both in absolute terms as well as establishing better visibility over future dividend receipts, given these receipts are treated by Fitch before FFO and therefore benefit FFO based financial metrics. Our base case envisages FFO adjusted net leverage approaching 2.4x in 2016 offering some headroom verses a downgrade guideline of 2.5x.
TLSN is the largest shareholder in Turkcell but it continues to have no board representation at the company, with management comments suggesting that while better relations exist, shareholder tensions have not been fully resolved.
Fitch's key assumptions within the rating case for TLSN include:
-Revenue to increase by 4%-5% in 2015 driven by M&A (Tele2 Norway), followed by flat to marginal declines due to weaker growth in the Eurasian markets and B2B pressures in domestic markets.
-Nordic and other European operations remain broadly stable. Group EBITDA margin maintained at around 34% based on management's cost-efficiency programme and synergies achieved in acquired businesses.
-Norwegian synergies to increase EBITDA by SEK650m in 2015 and SEK900m by 2016.
-Dividends to remain at around SEK13bn per annum from 2015-18
-No further material M&A from 2016 onwards.
-SEK4.7bn dividend received from TurkCell in 2015, associate dividends of SEK2.0bn thereafter including a consistent receipt from Turkcell and Megafon.
-CAPEX to sales remaining high at 16-17% through 2015/16 as the company continues to roll out Fibre and 4G network coverage in its main markets before declining thereafter.
Future developments that may, individually or collectively, lead to negative rating action include:
Fitch would consider negative rating action if FFO adjusted net leverage was to trend above 2.5x for a sustained period of time. A substantial increase in competition or a weakening of economic conditions in key markets, volatility in emerging markets, including macroeconomic conditions and FX could all impact performance and lead to negative rating action.
Fitch does not consider positive rating action likely given the company's current financial structure, guided financial policy and operational profile.
As at year-end 2014 the company had access to EUR 2bn in undrawn revolving credit facilities expiring 2017. Reported cash and cash equivalents were SEK19.6bn at 1H15.