Fitch Places Axtel on Rating Watch Positive on Alestra Merger
Fitch currently rates Axtel's long-term Issuer Default Rating (IDR) 'B'. A full list of ratings is shown below.
Alestra is a Mexican fixed-line telecom operator and is a wholly owned subsidiary of Alfa S.A.B. de C.V. (Alfa), which is one of the largest business groups in Mexico with a diversified business portfolio. Axtel expects to close the merger by the end of the year following the necessary notification/approval process related with the telecom regulatory body and the stock exchange in Mexico. Post the transaction, Alfa will own 51% of stakes in Axtel, and Alestra will become a subsidiary of Axtel.
KEY RATING DRIVERS
Positive Merger Synergies:
The Rating Watch Positive reflects Fitch's view that the merged entity will benefit from an economy of scale and operational synergies, mainly in terms of network competitiveness and improved efficiencies, as well as a stronger market presence in the enterprise business segment in Mexico. Based on the operating result of each entity during the last 12 months as of June 2015, the combined revenues and EBITDA would amount to USD1.1 billion and USD363 million, respectively, which compares to Axtel's stand-alone figure of USD693 million and 192 million. Axtel expects to achieve an operational synergy of MXN1 billion a year (equivalent to USD60 million) once the operational integration is complete, which would represent close to 20% improvement from the current combined EBITDA level. Negatively, Axtel's small scale of operation in the highly competitive Mexican telecom industry will still remain a key credit concern.
Fitch forecasts the merged entity's financial profile to improve given Alestra's lower leverage compared to Axtel. As of June 30, 2015, Axtel's net leverage, excluding the adjustment for operating leases for tower assets, was 3.1x while that of Alestra was 1.2x. Based on the current financial profile of each entity without reflecting any synergy benefit, the merged entity's consolidated net leverage is estimated to be 2.2x.
As of June 30, 2015, Axtel's total gross debt amounted to USD770 million, of which more than 70% was accounted for by its senior secured notes due 2020. The notes have a change of control clause which would enable the noteholders to exercise a put option with Alfa becoming the major shareholder post the transaction. Fitch believes that it is Axtel's intention to attempt to amend the indenture by obtaining consent from the noteholders.
Axtel's credit quality will also benefit from becoming part of a strong business group in Alfa. While Fitch does not foresee any explicit legal or financial support from Alfa, Axtel should enjoy better access to capital markets/financial institutions when in need of external financing given the group's strong reputation and entrenched business position in the country. This should help strengthen Axtel's financial flexibility.
--The merger process to be completed by end-2015 without any major regulatory issues;
--No material changes on the pro forma financial profile of the merged entity, which is forecast to be stronger than that of Axtel;
--Axtel to be able to obtain consent from the 2020 notes holders to avoid triggering the change of control clause per the current indenture
Rating Watch Positive will be resolved upon the successful closing of the merger. Any potential upgrades in Axtel's ratings will largely hinge on Fitch's view on the operational/financial synergy from the merger, the merged entity's market position and business strategy, as well as the industry outlook going forward.
If the deal does not close, Fitch expects to affirm the company's current ratings, or re-evaluate if industry conditions and performance change substantially.
Axtel's liquidity is sound in light of its high cash balance of MXN2.8 billion as of June 30, 2015, which comfortably covered the short-term debt of MXN519 million. The company also has a USD130 million credit facility and does not face any sizable debt maturity until 2017.
FULL LIST OF RATING ACTIONS
Fitch has placed the following ratings on Rating Watch Positive:
Axtel S.A.B. de C.V.'s
--Long-term foreign-currency and local-currency IDR 'B';
--National long-term rating 'BB-(mex)';
--Senior secured notes due 2020 'B+/RR3';
--Senior unsecured notes due 2017 and 2019 'B-/RR5'.