AT & T Wireless Services Inc.: Updates Benchmark Report

Chris Diceman, CFA; Rory Buchalter / 416-593-5577 ext.2242, ext.2268 / cdiceman@dbrs.com

 

AT&T Wireless Services, Inc. (“AT&T Wireless” or the “Company”) has remained an investment grade credit since being spun off from AT&T Corporation with its strong balance sheet and favourable market position in the U.S. wireless market.  The Company has however, increased its debt levels significantly to fund acquisitions and its large free cash flow deficits.

 

The competitiveness of the wireless market has increased, with the national carriers responding with lower prices and larger buckets of minutes to deepen penetration levels.  Despite this pressure, AT&T Wireless has remained a net benefactor, as its subscriber growth in this environment has not sacrificed ARPU and customer turnover (churn) levels, and has been without the incurrence of unreasonable acquisition costs.  However, one area that remains a major challenge for the Company will be getting its EBITDA margins into the 30% range similar to its peers.

 

Although, debt levels are not expected to decline significantly over the next year, the Company will continue to experience EBITDA and operating cash flow growth, with (1) subscriber additions; (2) revenue growth in short message services (SMS), data and Internet usage as more subscribers are loaded on its GSM/GPRS network; and (3) lower operating costs.  However, churn could pressure this growth going forward with the expected introduction of wireless number portability in later this year.

 

Capex levels are expected to fall significantly in 2003, allowing the Company to likely generate positive free cash flow for the first time.  Capital intensity will be lower as the majority of the GSM/GPRS overlay has been completed.  In addition, the Company will continue to benefit from capital savings through its joint venture with Cingular.  Also benefiting the Company is the revised shareholder agreement with NTT DoCoMo, Inc., and the relief of the NextWave licence obligation of $2.6 billion.

 

Overall, the generation of free cash flow and stable debt levels will help AT&T Wireless to (1) improve its credit metrics in 2003, (2) lower its financial risk profile, (3) add to its significant liquidity available (currently $10 billion), and (4) affirm the Company’s investment grade rating.

 

The Company may look opportunistically to acquire smaller entities to add subscribers or add to its network coverage weighing this against organic growth in these areas.  With its financial strength, AT&T Wireless remains a likely integral player in consolidating the wireless industry in the U.S. in the medium term.

 

 

Dominion Bond Rating Service Limited (DBRS) has published a full report that provides additional analytical detail.  To see this report, please click on http://www.dbrs.com/web/sentry?COMP=2900&DocId=122721.  If you do not have access to this document, please contact us at info@dbrs.com.