Fitch Ratings has assigned the senior secured debt issued by Zegona Holdco Limited (Vodafone Spain) and its subsidiaries final ratings of 'BBB-' with a Recovery Rating of 'RR2'.
Fitch has also affirmed Zegona's Long-Term Issuer Default Rating (IDR) at 'BB+' with a Stable Outlook. The rating actions follow refinancing of the company's acquisition facilities.
Zegona's ratings reflect its stable position in the Spanish telecoms market with strong prospects for operational improvement, well-invested mobile and fixed networks, positive free cash flow (FCF) and conservative financial policy. The ratings also factor in relatively low profitability, moderate leverage and operational execution risks.
Completion of the proposed fibre network transactions (FibreCo) could result in tightened leverage thresholds, reflecting a reduction in fixed network ownership that changes the business's operating profile. Any rating impact will depend on the final ownership holding in each FibreCo and the amount and use of proceeds from network monetisation.
Key Rating Drivers
FibreCo Transactions: We expect Zegona's announced FibreCo transactions with Telefonica and MasOrange and its new fibre wholesale contract with Telefonica will potentially support its market position by providing rapid access to local access fibre connections across the whole country. This will also reduce capex on a potentially lengthy and costly network upgrade and lower overbuild risks. However, in Fitch's view, a reduction of fixed network ownership would create a more mobile-centric network operator with a weaker operating profile than a fully-integrated operator due to reduced exposure to network cash flows and a potential increase in margin pressure.
In the event all transactions complete as planned, we expect the change in operating profile could result in a reduction of Zegona's leverage thresholds by 0.2x-0.5x EBITDA net leverage after completion of the transactions. The extent and consequent impact on the ratings will depend on Zegona's final FibreCo ownership and the amount and use of proceeds from the potential monetisation of its network infrastructure. Adherence to stated leverage targets of the company-defined 1.5-2.0x EBITDAaL net leverage (corresponding to about 2.0-2.5x Fitch-defined EBITDA net leverage) combined with sufficient FCF improvement will be critical for the rating trajectory.
Competitive Rational Market: Prior to the MasMovil and Orange merger in 1Q24, the Spanish market was highly competitive due to four major network operators and a high number of virtual mobile network operators (MVNO)and altnets. This led to consistent market share losses for the established operators. We believe the merger will help drive rational market competition. The conditions of the merger include divestment of 60MHz of spectrum in the mid-to high-band frequency ranges to Digi, an MVNO, and offer of an optional national roaming agreement to the company.
The acquired spectrum could allow DiGi to deploy a hybrid network model in the medium term. This may enable Digi to increase its market scale and profitability while largely offsetting infrastructure investment risks. However, it is unlikely to provide the basis or motives for it to become another full mobile operator in Spain. We therefore expect the Spanish market to remain competitive but rational over the next four to five years.
Positive New Strategy: We view the company's new strategic direction under Zegona's management as positive for its financial profile. Revenue growth over the four years post-acquisition should be supported by CPI-linked price increases, improving product proposition in the value consumer segment and expansion in the wholesale and business segment. Moreover, cost and capex savings should help improve profitability over FY25-28 (financial year ending March). These include bad debt, network and fixed-access cost savings, subscriber acquisition cost reductions and network and IT capex reduction.
Execution Risk, Credible Record: Transformation, cost- and capex-saving programmes can take longer than expected, often requiring higher transformation spending and investment. Vodafone Spain's new management under Zegona's ownership has demonstrated a good record with Euskaltel and we expect it to return Vodafone Spain to a growth trajectory. However, we cautiously assume flat growth in FY25 and around 1.1-1.3% per year thereafter given competitive pressures. We also assume a discount on the planned cost and capex savings, reflecting execution risks.
Third Player, Turnaround Potential: Zegona has number three market positions in the mobile and fixed segments (based on mobile and fixed-line shares as of December 2024). The company fully owns its well-invested mobile network and fixed network that covers 40% of total homes passed. Zegona's service revenues declined by 2.6% CAGR over FY21-24 due to continued price competition and a decreasing customer base. However, the company-defined EBITDA margin remained around 32-33%, supported by the ongoing cost efficiency programme.
Positive FCF: We expect Zegona to maintain positive FCF generation, with medium to high-single pre-dividend FCF margins in FY26-28 supported by gradual profitability improvement and capex savings partly offset by high interest payments. This supports the fast deleveraging profile. The strength of the FCF and improved financial flexibility would be crucial for an upgrade.
Deleveraging Path: We estimate Fitch-defined EBITDA net leverage to be at around 4.0x in FY25. However, we expect leverage to quickly decrease to below the downgrade thresholds of 3.6x in FY26 supported by EBITDA growth and positive FCF generation. Deleveraging could be faster if EBITDA grows above our expectations or through debt repayment following the FibreCos' monetisation.
Derivation Summary
We consider Zegona's operating profile weaker than single-market operators NOS, S.G.P.S., S.A. (BBB/Stable), Royal KPN N.V. (BBB/Stable) and Lorca Holdco Limited (MasOrange; BB/Positive), which have stronger domestic market positions, full ownership of both fixed and mobile networks and higher EBITDA margins. This is reflected in Vodafone Spain's tighter leverage thresholds. MasOrange has a lower rating than Vodafone Spain as the latter has lower leverage.
If all of Zegona's FibreCo transactions were to complete as planned, the company's business profile will be more mobile network operator-centric like Telefonica Deutschland Holding AG (TEF DE; BBB/Stable). However, TEF DE has lower product diversification, with 70% of revenues coming from the mobile segment. It also derives a significant share of its wholesale revenue from an MVNO, which exposes it to some revenue volatility in the long term, as its main wholesale partner 1&1 will move to another MNO in the next two years.
Key Assumptions
Flat revenue growth in FY25 and around 1.1-1.3% per year thereafter
Fitch-defined EBITDA margin of 24% in FY25 improving to 27% in FY27. We exclude intercompany costs that Vodafone Group reported below EBITDAal as we do not expect them to be there post transaction.
Fitch-defined capex (excluding subscriber acquisition costs) at 10.9% of revenue in FY25 slightly improving to 10.6% in FY27
Dividend payments of EUR24 million per year in FY25-FY27
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Persistent erosion of the company's market position, as measured by its overall share of retail revenue, convergent services, pay-TV and fixed broadband
Meaningful delays in extracting cost savings, resulting in Fitch-defined EBITDA margins below 25% on a sustained basis
Cash flow from operations (CFO)-capex/gross debt below 9.0% on a sustained basis
EBITDA net leverage above 3.6x on a sustained basis
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Revenue and EBITDA growth with a strengthened operating profile and competitive capability and materially improved market share positions
CFO-capex/gross debt above 11.5% on a sustained basis
EBITDA net leverage below 3.0x on a sustained basis
Liquidity and Debt Structure
We expect the company to have adequate liquidity, supported by expected positive FCF generation in FY25-27, an undrawn EUR500 million revolving credit facility in FY25-27 and long-dated maturity with new term loan A, TLB and senior secured notes maturing in 2029.
Fitch rates Zegona's senior secured debt at 'BBB-' in accordance with its Corporate Recovery Ratings and Instrument Ratings Criteria, under which it applies a generic approach to instrument notching for 'BB' rated issuers. We label Zegona's senior secured debt as 'category 2 first lien' under our criteria, resulting in a Recovery Rating of 'RR2', with a single-notch uplift from the IDR to 'BBB-'.
Issuer Profile
Zegona Holdco Limited is a holding company of Vodafone Holdings Europe, S.L.U. (Vodafone Spain) which is a telecoms company in Spain.
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.
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
