OREANDA-NEWS. S&P Global Ratings today said it has affirmed its 'BB+' long-term corporate credit and senior unsecured debt ratings on SoftBank Group Corp. (SoftBank) after the Japan-based telecommunications and Internet company said Monday that it will acquire leading U. K.-based semiconductor designer ARM Holdings PLC for about ?3.3 trillion. The rating outlook on SoftBank remains stable.

Despite our view that the proposed acquisition would be slightly negative for our assessment of SoftBank's business risk profile, we affirmed the ratings because we believe the acquisition's impact would be within the tolerances for our current assessment. This is because the new business would make only a small contribution to SoftBank's consolidated EBITDA for the near term. Meanwhile, the semiconductor business carries a higher risk of earnings volatility than telecommunications, in our view. Our affirmation of the ratings on SoftBank also incorporates its plan to finance most of the huge deal with proceeds from asset sales, which would somewhat ease the burden on the company's financial standing.

ARM is a highly profitable company, with an operating profit margin topping 40% thanks to its monopolistic hold on the global market for designing semiconductors for smartphones. It does not have any manufacturing facilities but rather licenses its designs to major semiconductor makers around the world. This allows it to better secure stable profits compared with companies that engage in both the manufacture and sale of semiconductors. However, the semiconductor business carries higher business risk than telecommunications, which brings in stable revenues from subscribers, because of sizable swings in earnings stemming from high market volatility and rapid technological innovations. Also, SoftBank may find it difficult in the near term to reap additional benefits from the proposed acquisition because ARM's domain largely differs from SoftBank's existing businesses, in our view. We also question whether SoftBank can successfully integrate the highly volatile semiconductor business into its group and operate it in a unified manner. Nevertheless, the planned acquisition will have a limited impact on SoftBank's business profile, in our view; ARM's profits would account for only about 5% of SoftBank's consolidated EBITDA for the next two to three years. Our assessment of SoftBank's business risk profile also incorporates our view that:The company's domestic telecommunications and Internet businesses generate stable EBITDA and are highly profitable; U. S. subsidiary Sprint Corp. has low profitability and a weak position in the highly competitive U. S telecom market; and SoftBank's growth strategy is very aggressive.

Accordingly, our assessment of SoftBank's business risk profile as satisfactory is likely to remain unchanged even after the planned acquisition of ARM.

To finance the approximately ?3.3 trillion deal, SoftBank plans to use the ?2.3 trillion it would raise primarily by selling assets. Of the ?2.3 trillion, it monetized part of its stake in Alibaba Group Holding Ltd. in June and plans to sell all of its shares in Supercell Oy for a total of nearly ?2 trillion in cash. Because the amount of proceeds from these asset sales slightly exceeded our assumption, we believed SoftBank had built up extra capacity for future acquisitions and investments. We estimate the post-acquisition ratio of debt to EBITDA (adjusted and consolidated, excluding captive finance operations) will stand at about 4.6x compared with 4.1x as of end-March 2016. The estimated post-acquisition ratio, as well as other key financial indicators that would deteriorate, is within the tolerances for our current assessment of its financial risk profile. However, the ARM deal is occurring earlier and is larger than we assumed, and comes after SoftBank's February announcement of a ?500 billion share buyback plan. These factors have strengthened our view that SoftBank's growth and financial strategies are very aggressive. Our assessment of SoftBank's financial risk profile also reflects:A heavy debt burden due to huge acquisition and investment costs and Sprint's weak cash flow; and Continued pressure on SoftBank's free operating cash flow (FOCF) in the next one to two years as a result of the group's continued high capital expenditures and weak performance of the U. S. operations.

Accordingly, we continue to assess SoftBank's financial risk profile as aggressive.

We haven't substantially changed our base-case scenario for SoftBank because the planned acquisition is unlikely to affect the company's telecommunications business or FOCF. However, we expect post-acquisition debt to EBITDA to hover in the mid-4x range because SoftBank will allocate a large amount of cash on hand, including proceeds from asset sales, to the acquisition.

The planned acquisition will not affect our assessment of SoftBank's liquidity. Therefore, we continue to assess SoftBank's liquidity as adequate and expect its liquidity sources to reach about 1.2x its uses over the next 12 months.

The stable outlook reflects our expectation that profits from the company's domestic mobile communications and Internet businesses will likely grow steadily, leading to continued positive FOCF in its domestic telecommunications business. We believe this will ease the negative impact deficits in FOCF at Sprint will have on the company's key consolidated financial indicators, as well as temper the high risk of volatile earnings from the semiconductor business. By funding most of the planned ARM acquisition through asset sales, SoftBank will soften the financial burden stemming from the deal. Nevertheless, we consider SoftBank's financial policy and its maintenance of adequate liquidity as key factors in our analysis, particularly because it faces a mountain of debt that matures by year-end.

We would downgrade SoftBank if debt to EBITDA sustainably exceeded 5x. This could result from another large acquisition or aggressive investments in pursuit of growth; or steeper-than-expected weakening of FOCF at Sprint. A downgrade is also likely if competitive conditions in the domestic market deteriorate significantly, materially eroding the group's consolidated profitability.

We think an upgrade is unlikely in the near term, given the addition of the highly volatile semiconductor business to SoftBank's business mix; Sprint's gradually improving but still weak operating performance; and SoftBank's strong appetite for growth. Nonetheless, we would consider raising our rating on SoftBank if it improved its financial standing materially and sustainably while significantly reducing the group's (including Sprint) debt. For instance, an upgrade would be contingent on debt to EBITDA decreasing to below 4.0x on a sustainable basis even after incorporating the possibility of more acquisitions or investments for growth.