A Moody’s report has said that Saudi Telecom Company’s (STC) acquisition of Vodafone Egypt would be credit negative if the transaction is fully debt-funded, adding that it does not expect the deal to close before June 2020.

STC had on Jan.29 struck a non-binding deal to buy Vodafone Group’s 55 per cent stake in Vodafone Egypt for US$2.39bn.  Another 45 per cent is held by Telecom Egypt, itself owned 80 per cent by the Egyptian government and 20 per cent as free-floating shares on the stock exchange.

The deal values Vodafone Egypt, the country’s biggest mobile operator with 40 per cent market share, at $4.35 billion, and will include the use of the Vodafone brand, and a range of other Vodafone services.

According to the credits rating agency, the transaction, if fully debt-funded, would increase STC’s leverage (debt/EBITDA) to around 1.0x from 0.7x as of year-end 2019, a credit negative because leverage would be high for STC’s A1 rating. “The transaction will likely negatively pressure margins that are already pressured because of high costs related to the 5G roll-out in Saudi Arabia (A1 stable),” the report said.

Noting that the deal will increase STC’s diversification, with pro forma revenue from international operations contributing around 17 per cent to total revenue, from 9 per cent in 2019, Moody’s expects pro forma retained cash flow/debt to decrease to 37.3 per cent from 52.3 per cent at year-end 2019 and pro forma EBITDA margins to decrease to around 48.1 per cent from 48.3 per cent at year-end 2019.

“The decrease in margins could be partially offset by synergies the company can extract from the transaction, given the proximity of the two countries and the lower labour cost in Egypt compared to Saudi Arabia,” it said.

Meanwhile, Telecom Egypt – the country’s Financial Regulatory Authority (FRA) – confirmed the STC offer would be subject to a 1992 law requiring a mandatory tender for any outstanding shares. According to the law, Saudi Telecom Company (STC) is required by law to submit a mandatory tender offer (MTO) for the 44.8 per cent stake in Vodafone Egypt owned by Telecom Egypt (TE) and the 0.2 per cent held by minority shareholders if it closes its bid to acquire the other 55 per cent from Vodafone Group.