SBC Communications Inc. & SBC Communications Capital Corporation: Places Under Review with Negative Implications

Peter Schroeder; Paul Holman/416-593-5577 ext.2279, ext.2234/ps@dbrs.com

 

 “p” indicates based on public information.

 

DBRS has placed the ratings of SBC Communications Inc. and SBC Communications Capital Corporation (collectively, “SBC” or the “Company”) “Under Review with Negative Implications” following the announcement by wholly owned Cingular Wireless LLC (“Cingular”) to acquire AT&T Wireless Services Inc. (“AT&T Wireless”) for about $41 billion in cash.  Cingular will receive the funding for the acquisition from SBC and BellSouth Corporation (“BellSouth”) – about $36 million net of the cash on hand at AT&T Wireless.  SBC expects it will need to raise between $10 billion to $13 billion in new capital, along with cash on hand and the proceeds of some non-core assets to provide it a portion of the funding – about $22 billion in total. 

 

If SBC borrowed the $10 billion to $13 billion, it would cause debt levels at SBC to increase significantly, along with the financial risk profile of the Company.  This would be especially true if Cingular had limited ability to increase cash payments to its parents.  Hence, after the acquisition closes, SBC could have lower net cash flow as the additional interest expense exceeds any additional cash flow from Cingular.  Clearly any additional financial pressure, along with the growing business risk for incumbent telcos, increases the Company’s risk profile. 

 

DBRS does note that SBC’s operating cash flow is strong and, despite increased financial risk, it does have a significant portfolio of non-core assets that could be sold, providing significant liquidity.  This includes its Directories business.

 

Details of the acquisition include:

Cingular will offer $41 billion in cash and assume AT&T Wireless net debt of $6 billion.   SBC and BellSouth will provide the funding to Cingular, while maintaining the current 60%/40% ownership structure.  SBC’s commitment to the $41 billion in financing is as follows: (1) SBC’s 60% of the $36 billion ($41 billion less AT&T Wireless’ $5 billion cash balance), estimated at $22 billion; and (2) SBC’s $22 billion would be reduced to between $10 billion to $13 billion using: (a) cash on hand ($5 billion); (b) 2004 free cash flow ($2 billion); and  (c) SBC asset sales of $4 billion.

 

Overall, the increase in financial risk through the completion of this transaction combined with the growing business risk in the industry could result in a future credit action.  The SBC rating will be reviewed once this transaction is completed, which will require a full regulatory review.  The Company anticipates this will be approved by year-end 2004.