Category: Corporates

Brazil, March 24, 2021 – Carrefour S.A. (Baa1 negative) announced the acquisition of Brazilian food retailer Grupo Big S.A. for an enterprise value of around €1.1 billion, equivalent to an estimated 8x enterprise value/EBITDA multiple before synergies. The transaction is expected to close in 2022 following regulatory approval from the Brazilian authorities. Overall, we view the acquisition as credit positive for Carrefour because it will be funded by cash, reducing gross leverage once synergies are achieved, and strengthen its leading position in Brazil.

The acquisition will improve Carrefour’s business profile by increasing its overall scale and geographical diversification, in addition to strengthening its position in Brazil. Carrefour and Grupo BIG are the country’s largest and third-largest food retailers, respectively, and have complementary geographical coverage: Grupo BIG has a strong presence in the north-east and south of Brazil, where Carrefour currently has limited penetration. In addition, the similarity of Grupo BIG’s formats with Carrefour’s (mainly cash and carry and hypermarkets) will facilitate the companies’ integration.

Carrefour will finance the transaction through a mix of cash (70%) and equity (30%) and we expect it to have sufficient cash on balance sheet to fund the acquisition. As a result, Moody’s adjusted debt/EBITDA will decrease by around 0.2x pro forma for the transaction and taking into account around €260 million of run-rate EBITDA synergies that it expects to achieve over a three-year period. However, net debt will deteriorate slightly once the transaction completes because of the estimated €800 million acquisition cost. We also expect restructuring costs to partially offset the additional cash flow from Grupo BIG in the years following the transaction’s closing.

Credit Outlook: 29 March 2021. Pg. 4
Moodys

Colombia, January 27, 2021 – Ecopetrol S.A. (Ecopetrol, Baa3 stable) announced the acquisition of 51.4% of the capital of Interconexion Electrica S.A. E.S.P. (ISA, Baa2 stable). ISA is a publicly traded power company owned by the Government of Colombia (Baa2 negative). The transaction is credit positive for Ecopetrol because ISA generates a more stable EBITDA compared to that of Ecopetrol’s oil and gas commodity business, which increases cash flow visibility for Ecopetrol. Also, ISA operates in Colombia, Brazil, Peru and Chile, which reduces Ecopetrol’s geographic concentration risk; and Ecopetrol’s capital structure will not materially change after the completion of the acquisition transaction.

The acquisition of the controlling stake at ISA may cost approximately $4 billion. Because ISA is publicly traded, the acquisition amount should be based on market prices and on standard valuation practices, despite the Colombian government currently controlling Ecopetrol’s and ISA’s capital.

Ecopetrol’s plans to sell shares and assets as well as raise debt to fund the acquisition of ISA. The company expects that the combination of such initiatives will not deteriorate its credit metrics materially. We estimate that Ecopetrol’s debt/EBITDA ratio was around 3 times at year-end 2020 and that this credit metric will remain relatively stable in the next few years, pro-forma for the consolidation of ISA. Our estimate is based on an average Brent oil price of $45 per barrel (dpb) in 2021 and 50 dpb in the medium term.

We understand that after completion of the transaction, ISA will contribute with 15-20% of Ecopetrol’s consolidated EBITDA. We assume that the companies’ business strategies will not change materially and that their respective management teams, dividend policies and capital investment plans will remain mostly unchanged.

Ecopetrol is the largest integrated oil and gas company in Colombia. Ecopetrol has three business segments, namely exploration and production, refining activities and transportation and logistics. Its production averaged around 639,000 barrels of oil equivalent per day, net of royalties, in the 12 months that ended September 2020, and total assets amounted to $43 billion in September 2020. The Colombian government owns 88.5% of the company’s capital and the balance has been traded on the Colombian Securities Exchange since November 2007.

ISA, headquartered in Medellin, Colombia, is an operating holding company with businesses in the electricity transmission, toll roads, telecommunications, and systems management sectors. The company holds direct and indirect ownership stakes in a portfolio of subsidiaries located in Colombia, Brazil, Peru and Chile.

Credit Outlook: 1 February 2021. Pg. 5
Moodys

Costa Rica, July 30, 2020 – Liberty Latin America Ltd. (LLA), the parent of VTR Finance N.V. (Ba3 stable), announced a $500 million deal to acquire Telefónica S.A.’s (Baa3 stable) subsidiary Telefónica Costa Rica. LLA intends to include Telefónica Costa Rica in the VTR credit pool, which will also include Cabletica, LLA’s existing fixed-line business in Costa Rica. Pending regulatory approvals, VTR expects the acquisition to close in the first half of 2021. LLA will increase its market share in Costa Rica, and cost synergies will improve the combined group’s EBITDA margin in the next two to three years, credit positives for LLA.

The all-cash transaction implies a $500 million enterprise value for Telefónica Costa Rica on a cash- and debt-free basis, equivalent to a 6.0x EBITDA multiple based on Telefónica Costa Rica’s 2019 EBITDA, including projected annual run-rate synergies. But LLA also intends to finance the acquisition with some borrowing from local lenders and from VTR Finance N.V. The deal’s credit implications for the VTR credit pool will depend in part on how much new debt it takes on for the transaction.

The acquisition of Telefónica Costa Rica and its combination with Cabletica will create an integrated telecom operator that will provide a full suite of fixed and mobile services. Buying Telefónica Costa Rica would give LLA ownership of Costa Rica’s second-largest mobile operator, with a market share of around 24%, on top of its number-two fixed-services operator, with Cabletica’s roughly 20% market share for broadband and 25% for pay TV.

We expect that the combination will also result in cost synergies, improving the combined group’s EBITDA margin during the next two to three years. The synergies that LLA expects to generate will effectively reduce the EBITDA multiple of the purchase price to 6.0x from 7.4x based on 2019 data, or an improvement in the target’s EBITDA to about $80 million, including synergies, from $68 million in 2019.

In addition to borrowings in Costa Rica and at VTR Finance N.V., LLA would finance the remainder using its own liquidity and other sources of capital. Although LLA has not confirmed the exact funding mix, the group said that it is targeting about 4x debt on the acquired asset’s EBITDA including synergies, according to LLA’s calculations, implying about $300 million of incremental debt at VTR.

VTR’s Ba3 rating already reflects the contribution of Cabletica, which LLA anticipated to take place in the first quarter of 2021, and an adjusted gross debt/EBITDA ratio that will decline to close to 4x by the end of 2021 from 4.6x in 2019. Once the funding mix is confirmed and more data become available about Telefónica Costa Rica’s contribution to VTR, we will assess whether the deleveraging trend for VTR remains in line with what we had expected before this acquisition.

Telefónica Costa Rica is Costa Rica’s second largest mobile service provider. As of 30 June 2020, the business had 2.3 million subscribers, and its mobile network currently has approximately 90% LTE population coverage.

Cabletica, which LLA acquired in 2018, is a leading fixed-line operator in Costa Rica, offering broadband, Pay TV and fixed telephony services, with about 600,000 homes passed and 430,000 revenue generating units as of March 2020, and revenue of CRC77 billion ($130 million) in 2019.

VTR provides broadband and wireless communications services in Chile and is a wholly owned subsidiary of LLA. As of March 2020, VTR’s network passed 3.72 million homes and served about 2.97 million fixed revenue generating units. The company also served around 304,900 mobile subscribers as a mobile virtual network operator. The company reported revenue of CLP663 billion (around $800 million) for the 12 months to March 2020.

Credit Outlook: 3 August 2020. Pg. 10
Moodys

Brazil, March 10, 2020 – Brazil’s telecom operators Telefonica Brasil S.A. (Vivo, Ba1 stable) and TIM S.A., the local subsidiary of Telecom Italia S.p.A. (Ba1 negative), announced a joint plan to acquire the mobile business of Oi S.A., their competitor now operating under bankruptcy protection.
The potential transaction, whose terms remain undisclosed, would benefit the entire Brazilian telecom industry by excluding Oi from the market, thereby enabling the remaining three mobile operators to increase profits.

Oi, which filed for judicial recovery in 2016, is the most aggressively priced operator in Brazil’s mobile telecom market. Its removal would make Brazil’s competitive environment more rational and profitable. An increase in profitability would allow the three remaining mobile competitors to invest more easily in infrastructure, better service quality and balance-sheet deleveraging.
Vivo and TIM jointly intend to acquire Oi’s mobile business, as a whole or in parts. Each company would receive a portion of Oi’s mobile business, but TIM would probably get the largest part to avoid excessive market concentration with Vivo. An outsized increase in Vivo’s market share would likely have more trouble winning approval from CADE, the Brazilian federal antitrust authority. Vivo leads the mobile market in Brazil with 33% market share, followed by TIM and Claro with 24% each, and Oi with 16% as of January 2020.
Even without details yet about the market value of Oi’s mobile business or how Vivo and TIM would finance their acquisition, Vivo’s balance sheet is strong enough to support a debt-financed acquisition without significant stress on its credit metrics. Vivo had a of 0.7x total adjusted debt/EBITDA ratio at the end of 2019, and a 20.7% free cash flow/debt ratio.
The proposal marks a relatively rare opportunity in Brazil’s telecom market, whose M&A opportunities are limited; unless Oi sells its assets, there are no other significant acquisitions remaining. Claro, the local subsidiary of America Movil S.A.B. de C.V. (A3 stable), acquired Nextel Brazil in March 2019 for around $900 million. The move strengthened the Mexican group’s mobile business in Brazil, particularly in the populous states of Rio de Janeiro and São Paulo, and gave Claro valuable spectrum in Brazil.
The Vivo-TIM deal would benefit Claro as well, leaving only three operators competing in the 5G auction slated for December 2020, implying more capacity for each company just as Brazil has relaxed its spectrum licensing rules.

Under a new telecom bill approved in 2019, Brazilian telecom operators can renew mobile spectrum licenses more than once, giving them longer term visibility. Previously, an operator could only renew its license once, and had to go through the bidding process after the first renewal.

Credit Outlook: 16 March 2020. Pg. 31
Moodys