BellSouth Corporation: Places Under Review With Negative Implications

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

 

“p” indicates the rating is based on public information

 

DBRS has placed the ratings of BellSouth Corporation (“BellSouth” or the “Company”) “Under Review With Negative Implications” following the announcement by wholly owned Cingular Wireless LLC (“Cingular”) that it will 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 Communications (“SBC”) and BellSouth – about $36 million net of the cash on hand at AT&T Wireless.  BellSouth expects it will need to raise between $8 billion to $10 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 $14 billion in total. 

 

If BellSouth borrowed $10 billion, it would cause debt levels at BellSouth 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, the Company 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 growing business risk for incumbent telcos, increases the Company’s risk profile. 

 

DBRS does note that BellSouth’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 the following:

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.  BellSouth’s commitment to the $41 billion in financing is as follows: (1) BellSouth’s 40% of the $36 billion ($41 billion less AT&T Wireless’ $5 billion cash balance) is estimated at $14 billion; and (2) BellSouth’s $14 billion would be reduced to between $8 billion to $10 billion using: (a) cash on hand of $4.5 billion; (b) 2004 free cash flow of $1 billion; and (c) asset sales of $1 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 BellSouth 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.