DBRS Upgrades AT&T Wireless to A (low)p, , Rmvd from UR-Dev

“p” indicates based on public information.

DBRS has upgraded the rating of AT&T Wireless Services Inc. (“AT&T Wireless”) to A (low)p from BBB (high)p. The trend is changed to Negative from Stable. The debt rating is the same as that for Cingular Wireless LLC (“Cingular” or the “Company”), following Cingular’s successful US$41 billion acquisition of AT&T Wireless. Cingular’s ratings have been confirmed at A (low)p, with a Negative trend. With this transaction, and the cross-support in place between the companies, DBRS considers these two entities as a consolidated credit.

The A (low)p rating reflects three key factors:
(1) The size and scale of the combined entity, now the largest wireless carrier in the U.S with 47.6 million subscribers, and the potential to achieve sizeable cost, network, and operational synergies;
(2) The continued operational and financial support shown by the parents, SBC Communications Inc. (“SBC”) and BellSouth Corporation (“BellSouth”); and
(3) The reasonable leverage of the combined entity with roughly US$23 billion of debt and a net debt-to-EBITDA ratio of roughly 2.5 times.

However, the Negative trend takes into account:
(1) The pressure on the combined operating metrics including weak EBITDA margins, and above average monthly churn rates as well as the momentum that was somewhat lost with AT&T Wireless over the past year in gaining its share of net additions; and
(2) The significant integration risks involved with this transaction. This includes integrating back office and billing systems for nearly 50 million subscribers as well as four national wireless networks (TDMA and GSM/GPRS).

DBRS believes the rating trend for the combined operations could be stabilized if the integration and operational risks in combining these two entities are resolved over the near to medium term. The successful integration of the two businesses would include:
(1) Achieving the sizeable operating and capital synergies as anticipated;
(2) Maintaining a leading market position including acquiring its share of net subscriber additions;
(3) Strengthening its operating metrics including improving its EBITDA margins to above 30%, and reducing monthly churn levels to 2% or below; and
(4) Generating strong free cash flow allowing it to aid the reduction of its parents’ and likely its own financial risk.

Details and a timeline of the transaction are as follows:
- On February 17, 2004, Cingular announced its offer to acquire AT&T Wireless for US$41 billion in cash and assume roughly US$10.6 billion in gross debt.
- On October 25 and October 26, 2004, Cingular received approval from the U.S. Department of Justice (DOJ) and the Federal Communications Commission (FCC) respectively, to proceed with the transaction. This approval was subject to certain conditions.
- SBC and BellSouth have provided roughly US$35 billion (US$41 billion less AT&T Wireless’ cash balance) to Cingular in the form of an equity injection to purchase AT&T Wireless’ equity.
- AT&T Wireless and Cingular will become co-obligors of each other’s debt obligations (roughly US$11.5 billion).
- The transaction has created the largest wireless carrier in the U.S. with just under 50 million subscribers operating on similar technology platforms: analogue, TDMA, and GSM/GPRS/EDGE.

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