Fitch Ratings has taken a negative outlook on Vodafone Group plc’s (VOD - Analyst Report) long-term prospect while maintaining an A- issuer default rating, which is an investment grade rating of the credit rating firm. The negative stance is based on limited visibility of return on Project Spring Investment and risks arising from probable acquisitions.
The European telecom giant plans to invest around £7 billion ($11.67 billion) in its fixed and mobile networks over the next couple of years to improve customer service and enterprise service divisions. Vodafone will leverage from the investment by offering an advanced network, thus gaining market share from its competitors.
However, the rating firm argued that the company needs to convince its customers about its network differentiation, which could fetch them a premium price and enhance its cash flow generation ability.
Notably, in Dec 2013, the U.S. Federal Communications Commission (FCC) gave its approval to Verizon Communications Inc. (VZ - Analyst Report) for purchasing Vodafone’s stake in the former for $130.0 billion. The deal was closed in Feb 2014, and left Vodafone with an enormous corpus of fund in its balance sheet.
The huge fund can tempt Vodafone to indulge in further acquisitions, in particular European fixed line assets, to expand its presence in those pressured markets. According to Fitch, a possible move in this direction can jeopardize its investment grade rating.
Further, the company’s presence in emerging market continues to grow post Verizon deal thus exposing itself to the volatility in these markets in addition to foreign exchange risks. The company is already struggling in India with two tax related litigations along with the uncertainty regarding spectrum auction in the country.
Any unfavourable outcome on these markets can affect the company’s rating going forward. We believe the company needs to be prudent with its investment plan to stop itself from any rating cuts in the future. Vodafone currently carries a Zacks Rank #3 (Hold).
Better-ranked stocks to consider within this sector are SK Telecom Company Ltd and Level 3 Communications Inc. (LVLT - Analyst Report) . SKM carries a Zacks Rank #1 (Strong Buy), while LVLT holds a Zacks Rank #2 (Buy).