Fitch Ratings has placed
The Rating Watch Negative reflects the potential effect on TELUS's credit profile from the definite agreement to acquire
TELUS's current gross leverage has been elevated due to recent spectrum investments and increased spending on fiber and 5G network deployment. Fitch expects pro forma gross leverage to approach mid-3x at close and trend downward toward 3x by the end of 2024.
Fitch expects to resolve the Rating Watch upon the close of the transaction, expected in 4Q22, following LifeWorks' shareholder approval and customary regulatory approvals. The final rating action will depend on Fitch's additional analysis of the transaction, including the effects of conditions, if any, placed on the transaction via the regulatory approval process. A downgrade would be limited to one notch; if the transaction does not close, pressure on the rating could remain given the current leverage profile.
Key Rating Drivers
Strong Market Position: TELUS's ratings reflect its operations as one of the three principal national mobile operators in the Canadian market, as well as its leading market position as a local wireline operator offering high-speed data, IPTV and voice services in western
LifeWorks Acquisition: LifeWorks is a provider of digital health and benefits solutions complementary to the company's technology oriented vertical,
TELUS is expected to finance the approximately
Elevated Leverage: Fitch expects gross leverage to be over 3x in 2023 and trend down to approximately 3x in 2024 due to the LifeWorks acquisition and as a result of recent spectrum investments, including the acquisition of spectrum in the 3500MHz auction in 2021, and increased spending in 2021 and 2022 on fiber and 5G network deployment. Although the spectrum acquisitions and robust network build have pressured leverage, Fitch believes the investments will enable TELUS to maintain a strong competitive position.
Strong Operational Performance: Revenues grew 9% in 2021, and Fitch expects revenues to grow in the low single digits in 2022 and 2023 due to continued solid operational performance and the LifeWorks acquisition. EBITDA is expected to grow in the mid- to high single digits in 2022 and the low double digits in 2023 due to strong growth at
Capital Spending and Spectrum Investments: Fitch believes TELUS's spending on fiber and spectrum support its longer term credit profile. The company completed a
Spectrum is a key resource that is largely available to TELUS only through auctions. The company spent a higher than anticipated
Derivation Summary
Fitch believes TELUS's business risk profile is very similar to peer
In addition, TELUS has diversified into healthcare, home security, business process outsourcing and agriculture. TELUS has demonstrated strong execution on its strategic initiatives, with growth in its wireless business, high-speed Internet services and IPTV platform. Wireless business growth has been supported by very low mobile phone customer churn.
Financial profiles at TELUS and Rogers are somewhat weak for their 'BBB+' ratings, as both have high leverage primarily due to spectrum acquisitions. In TELUS's case, capex related to fiber deployments also contributed to elevated leverage.
Fitch expects the companies' leverage, which recovered to mid-2x in 2018, will be elevated during the next few years due to further spectrum auctions, even absent considerations for TELUS's proposed acquisition of LifeWorks and Rogers' proposed acquisition of
TELUS has similar telecom and video-oriented offerings as its European peers, but does not compete directly with them. These carriers have much larger scale and more geographical diversification. The greater scale and geographically diversified portfolio enable higher leverage capacity for their ratings sensitivities compared to TELUS.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer Include
--Fitch assumes consolidated revenue grows in the low double digits in 2022 and 2023, as the LifeWorks acquisition closes around the last quarter of 2022, and due continued strong growth at
Fitch expects the EBITDA margin to remain in the mid-30% range (Fitch-adjusted calculation which excludes share-based compensation and nonrecurring items) owing to efficiency initiatives. Restructuring costs are excluded from EBITDA but are included in non-operating cash flow;
Capital spending levels in 2022 is expected to approximate
The auction timing and rules are subject to uncertainty, and can affect the bidding level;
Fitch has included placeholders for acquisitions in areas such as
Fitch assumes dividends grow at the low end of the company's 7%-10% target range, with the dividend reinvestment program moderating the cash outflow.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive actions are not expected in the near term given the agreement to acquire LifeWorks and the company's current elevated leverage profile.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The transaction and current leverage profile is likely to lead to a one-notch downgrade. A further downgrade from 'BBB' would result from expectations that gross leverage would be sustained above 3.2x due to a combination of acquisitions and spectrum purchases in the absence of a credible deleveraging plan.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Liquidity: TELUS's financial flexibility is good, owing to its balance sheet cash (
TELUS maintains a
On a pro forma basis, the
TELUS obtained
TELUS repaid
TI has a secured bank credit facility that expires in
The facility is nonrecourse to TELUS but is included in leverage metrics by Fitch and the company. At
Financial covenants in the
Issuer Profile
TELUS is one of the three major telecommunications providers in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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