Fitch: American Tower's Acquisition Not Expected to Pressure Rating
AMT plans to acquire 51% of Viom Networks Limited (Viom), a company that owns and operates approximately 42,200 towers and a small number of distributed antenna systems (DAS) in India. The purchase price is approximately 76 billion Indian Rupees (approximately $1.2 billion at current exchange rates) in the form of cash consideration. In addition, Viom has approximately $900 million of existing debt. The towers are being acquired from existing Viom shareholders including SREI Infrastructure Finance Limited, several minority shareholders and Tata Teleservices Limited. Certain remaining shareholders will have put options exercisable at certain dates requiring AMT to acquire the remaining shares.
Fitch recognizes the put options, exercisable beginning in 2018, represent potential event risk to AMT's credit profile. Should the put be exercised, Fitch will take into account the company's performance at that time, and expectations for leverage and financial performance after the put is exercised. Based on Fitch's expectation for leverage for American Tower at the time the put could first be exercised, Fitch believes the put may not have a meaningful impact on American Tower's overall credit profile, either currently or in 2018 (when first exercisable).
The acquisition will add a substantial number of towers to AMT's Indian tower portfolio. Post-closing, AMT will merge its existing tower portfolio in India, consisting of approximately 14,000 towers, with Viom, leading to ownership adjustments. Based on annualized results at the end of second quarter 2015, the acquired towers generate approximately $500 million in revenues (excluding pass-through revenues) and $320 million in gross margin. The transaction is expected to close in mid-2016.
Detailed financing plans for the acquisition have not been disclosed. However, the company has stated it will finance the transactions in a manner consistent with its current leverage targets. Historically, AMT has partly funded transactions with equity.
KEY RATING DRIVERS
Acquisitions in 2015 have elevated leverage and the current Negative Outlook reflects the increase in leverage. The rise in leverage was moderated by the nearly $3.8 billion in equity raised in early 2015 as part of the financing of the transactions. Fitch Ratings anticipates moderate deleveraging will produce gross debt/EBITDA (last twelve months EBITDA) in the range of 5.2x to 5.4x (as calculated by Fitch) at the end of 2016.
AMT's ratings are supported by the financial flexibility provided by its strong FCF and its high EBITDA margin, which has been consistently above 60% in recent years. The tower business model translates into strong, sustainable operating performance and FCF growth, aided by the company's significant scale and the favorable demand characteristics for wireless services (particularly data).
AMT is expected to continue to post strong FCF, generate mid- to high single-digit organic growth and maintain stable margins. Tower revenues are predictable, and growth is provided by contractual escalators embodied in long-term lease contracts and there are strong prospects for additional business. The tower industry is benefiting from wireless carriers heavily investing in fourth generation (4G) networks to meet rapidly growing demand for mobile broadband services.
U.S. wireless consolidation, if it were to occur, would not have a material effect on AMT's operations. Revenue growth from continued lease activity and contractual escalators in the U.S market would more than offset the relatively modest losses occurring over time due to potential consolidation.
In Fitch's opinion, AMT has a strong liquidity position supported by its free cash flow (FCF), cash on hand, and availability on its revolving credit facilities. Operationally, cash flow generation should remain strong. For the latest 12 months (LTM) ending June 30, 2015, FCF (cash provided by operating activities less capital spending and dividends) was approximately $616 million. As of June 30, 2015, cash on hand approximated $275 million and unused revolver capacity was approximately $2.5 billion. Of the cash balance, approximately $167 million was held by foreign subsidiaries.
AMT has two revolving credit facilities: a $2 billion, multi-currency facility due in January 2020 and a $2.75 billion RCF due in June 2018. The principal financial covenants have been amended, and for the first and second quarter of 2015, total debt/adjusted EBITDA (as defined in the agreements) is limited to no more than 7.25x. The ratio declines to 7.0x for the third and fourth quarters of 2015 and 6.0x thereafter. The covenants limit senior secured debt/adjusted EBITDA to 3.0x for the company and its subsidiaries. If debt ratings are below a specified level at the end of any fiscal quarter, the ratio of adjusted EBITDA to interest expense must be no less than 2.5x for as long as the ratings are below the specified level.
Debt maturities remaining in 2015 and for all of 2016 are nominal.
Return to Stable Outlook: The Negative Outlook could be revised if the company appears to be on a solid path to return to net leverage of 5x or below within a 12 to 24 month period.
A negative rating action could occur if operating performance falls short of expectations of at least mid-single-digit organic growth combined with margin pressure. In addition, if AMT's financing for the pending transaction, once completed, does not allow the company to reached Fitch expected metrics by the end of 2016, or if a subsequent, significant transaction delays anticipated deleveraging.