Mar. 21--FITCH Ratings Inc. on Friday downgraded Philippine Long Distance Telephone Co.'s (PLDT) long-term local currency outlook after the country's largest telco acquired a significant stake in Manila Electric Co. (Meralco).

In a statement, the London-based credit rating firm retained PLDT's long-term currency.

Issuer Default Ratings (IDR) at "BBB," which is below investment grade, but revised the outlook to "negative" from "stable."

Fitch's action comes on the heels of a similar action on the part of Moody's Investors Service. Moody's revised the status of PLDT's senior unsecured local currency issuer rating from "review for possible upgrade" to "review with direction uncertain."

The downgrade came after PLDT announced its unit, Pilipino Telephone Corp. (Piltel), would acquire a 20-percent stake in Meralco from the Lopez group, for P20 billion in cash. This represents about 40 percent of the PLDT group's pre-dividend free cash flow.

Besides Piltel, PLDT affiliate Metro Pacific Investments Corp. (MPIC) is also eyeing another

10.2-percent Meralco stake acquired by PLDT Beneficial Trust Fund. MPIC is the local unit of Hong Kong-based First Pacific, which in turn controls the Philippines' biggest telco.

Including the PLDT Beneficial Trust Fund's Meralco interest, the PLDT group will become the single biggest shareholder in the power distributor with 30.2 percent.

"On aggregate, the acquisition of an effective 30.17-percent stake in Meralco can be accommodated within PLDT's local currency rating of 'BBB', with net adjusted leverage for [fiscal year 2009] expected to remain below the maximum threshold of [one times] set by the agency," Priya Gupta, Fitch's Asia-Pacific telecommunications, media and technology team director said.

Fitch acknowledged the inherent synergies, but believes they are moderate and will take time to deliver value.

PLDT had said the acquisition of a stake in Meralco constitutes a strategic investment for the company that could lead to significant opportunities for operational and business synergies, resulting in new revenue streams and cost savings for both firms.

Other areas for possible collaboration are in easements and rights of way, bill statement printing and enveloping, general procurement, and advertising spend, it added.

With the acquisition, PLDT also said it may offer new services such as prepaid electricity, wireless bill payments, meter readings and the possibility of offering broadband over power lines (BPL).

Fitch viewed the transaction primarily as a "tactical move" in light of San Miguel Corp.'s (SMC) planned entry into telecommunications, in partnership with Qatar Telecom, through Philippine-listed Liberty Telecom Inc.

SMC currently owns 20 percent of Liberty and plans to increase its stake to 60 percent.

Southeast Asia's largest food and beverage conglomerate also plans to acquire a majority stake in Express Telecommunications Co. Inc.

With an estimated stake of 27 percent, Fitch said SMC is a major shareholder of Meralco, and expects to leverage the utility's infrastructure to offer telecom services.

Fitch said the "negative" outlook on the local currency rating of PLDT reflects limited headroom for a further increase in net leverage, and in this regard, the agency maintains a cautious view with respect to Meralco's weak financial position and the potential financial support that it may require.

"With regard to capital management, the proposed acquisition will not impact cash dividend payouts in 2009 and the group remains committed to its share buyback program for about 3 million common shares in 2009 to 2010," Fitch said.

In the same statement, Fitch also affirmed PLDT's long-term foreign currency IDR and outstanding global bonds and senior notes at "BB+," and its national long-term rating at "AAA." The rating outlook is stable.

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