Verizon Communications Inc. warned it won't be able to boost its credit rating as quickly as promised after a major debt ratings firm gave the company less room for error in a sagging wireless industry.
In a research note Wednesday, S&P Ratings Services noted that Verizon is exposed to the mature and highly competitive U.S. wireless business, the source of 70% of its revenue. As a result, S&P raised the debt standard that Verizon needs to meet to improve its credit rating from triple-B-plus.
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"We like the long-term potential for the wireless industry but the near term is very competitive," said Allyn Arden, S&P's primary analyst for Verizon. "For AT&T and Verizon, it is going to be hard for them to differentiate on their network alone."
Verizon has long promised investors it would return its debt ratings to their level before its $130 billion purchase of Vodafone PLC's minority stake in its wireless business. Only two weeks ago, Verizon told investors it was still on track.
The massive Vodafone deal was a major bet on the U.S. wireless market for Verizon, just two years after rival AT&T Inc. was blocked from pursuing a similar course with its bid to buy T-Mobile US Inc. AT&T shifted direction and bought satellite broadcaster DirecTV in 2015, and it is continuing down that path of diversifying with its agreement in October to acquire media company Time Warner Inc. for $85 billion. AT&T gets about 45% of its revenue from wireless service.
Verizon has passed on similar deals, instead focusing on smaller deals for AOL and Yahoo. The Wall Street Journal in January reported that Verizon explored a deal with Charter Communications Inc., showing the company was back on the prowl for large deals; but executives recently said the talks hadn't progressed.
In a securities filing Friday, Verizon said given S&P's change of view "we no longer expect to be able to achieve an upgrade to our pre-Vodafone credit rating" by 2018 or 2019. The company declined to comment further.
The comments could add to mounting investor pressure on Verizon to make a big acquisition that eases its dependence on the cellphone business, analysts said. In the first quarter, Verizon lost mainstream wireless customers for the first time ever and reported its total revenue dropped 7.7%.
Verizon shares gained 1.8% on Friday to $46.69, but are still down 13% year to date.
"Walking away from its pre-Vodafone credit aspirations gives Verizon greater financial and strategic freedom," said Citigroup analyst Michael Rollins, noting the company could use debt to accelerate investment or make acquisitions.
Verizon is scheduled to hold a meeting with Wall Street analysts on Monday afternoon.
Cellphone companies have faced an especially tough environment over the past few months as pricing has declined and customers hold on to their devices longer. Both Verizon and AT&T rolled out unlimited data plans in the first quarter, moves that hurt sales.
S&P warned it could also toughen criteria for AT&T were its proposed takeover of Time Warner to collapse, though S&P said that is unlikely.
Verizon made waves in the bond market in 2013 with its buyout of Vodafone's stake. It sold $49 billion of bonds, the largest corporate debt sale in history at the time. The company had $116.5 billion of debt outstanding at the end of the first quarter.
Verizon's credit ratings sagged under the new debt load, though it remained in solid investment-grade territory and faced relatively low borrowing costs. The company at the time pledged to regain its pre-transaction credit rating of A-minus by steadily whittling down its leverage.
"By and large, investors took it at face value," Mark Stodden, an analyst at Moody's Investors Service, said Friday. "The world changed between when they made that commitment and now."
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(END) Dow Jones Newswires
May 06, 2017 02:47 ET (06:47 GMT)