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Fitch: AT&T's Acquisition of Dobson Communications Not Expected to Impact Ratings

Posted on: Monday, 2 July 2007, 18:16 CDT

Fitch Ratings does not expect the acquisition by AT&T Inc. (AT&T) of Dobson Communications Corporation (Dobson) to have a meaningful effect on AT&T's credit profile. AT&T and its subsidiaries have an Issuer Default Rating (IDR) of 'A'. The Rating Outlook is Stable for all ratings.

On June 29, 2007, AT&T and Dobson announced an agreement whereby AT&T will acquire Dobson for approximately $2.8 billion in cash. Including the value of debt assumed in the transaction, the total value of the acquisition is approximately $5.1 billion. Expected synergies from the transaction have a net present value of approximately $2.5 billion. The acquisition of Dobson's rural properties is complementary to AT&T's wireless network with minimal overlap. Dobson has provided roaming services to AT&T and its predecessor companies since 1990, and has deployed GSM/EDGE-based network. Dobson serves approximately 1.7 million customers and covers nearly 13 million persons of population (POPs).

AT&T's rating incorporates Fitch's expectations that AT&T will maintain leverage in a range appropriate for the current rating category. Credit protection metrics, in the form of debt-to-EBITDA are expected, by Fitch, to be in the 1.5 times (x)-1.6x range in 2007, excluding the effect of the acquisition of Dobson which could close by the end of 2007. In 2008, Fitch believes that continuing synergy gains from recent acquisitions will enable AT&T to maintain relatively stable credit protection metrics while also including the full year effect of the acquisition of Dobson. With respect to the merger with BellSouth, Fitch expects AT&T to derive operating cost synergies as it integrates the two companies. Annual synergies are now expected to range from $2.6 billion-$3 billion in 2008, up from a $2 billion run-rate basis.

During the course of 2007, Fitch will continue to monitor AT&T's progress on integrating operations and achieving the synergies from the BellSouth merger and 2005 AT&T Corp. transaction. Over the next couple of years, AT&T will also need to make good progress on deploying its video strategy as it seeks to improve its consumer retail competitive position vis-a-vis cable multiple system operators that have deployed telephony service.

At the end of the first quarter of 2007, AT&T's debt stood at $62.6 billion and cash amounted to $2.4 billion. AT&T's liquidity is strong. To back its commercial paper program, AT&T currently has a five-year credit facility that expires in July 2011 with $10 billion of availability. AT&T has an option to increase the $10 billion amount to $12 billion, with agreement by the lending banks. The principal financial covenant requires debt-to-EBITDA, as defined in the agreement, to be no more than 3x. AT&T's current guidance, which is unchanged following the Dobson announcement, calls for free cash flow in the $4 billion-$5 billion range for 2007, and could reach $6 billion or more in 2008. As Fitch has previously noted, free cash flow in 2007 will be directed to stock repurchases as the company completes its $10 billion stock-repurchase plan in third-quarter 2007.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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