Credit rating agency Standard and Poor's on Thursday said a possible acquisition of Hutch-Essar by Vodafone was unlikely to threaten ratings for British giant, as the size and quality of the deal should be manageable in context of its debt capacity and financial policy.

S&P said it has not placed its ratings on Vodafone on "CreditWatch with negative implications" as yet, which generally follows a material event that indicates a significant probability of a rating change in the near term.

• The race for Hutch-Essar

"Although a successful controlling bid by Vodafone would be a material event, our assessment is that a bid at the discussed levels would be unlikely to threaten the ratings," S&P said in a research note published on Thursday.

This is mostly because S&P considers the size and quality of the target and the assumed consideration would likely be manageable in the context of the ratings, Vodafone's debt capacity, and management's financial policy, it said.

S&P said that if a full payment in cash and debt pound 10 billion ($19 billion) was made, this would be material compared with Vodafone's adjusted debt of pound 23.0 billion as on September 30, 2006.

The payment would be partly offset, however, against actual and potential cash inflows, it added.

S&P said that it was taking into account the assumed enterprise value as a valuation of equity and debt for the whole of the Hutchison Essar business.

While foreign ownership restrictions are likely to limit Vodafone's ownership to 74 per cent in the near term, S&P said it expects that the group would seek 100 per cent as and when possible.

S&P also expects the consideration to most likely be offset against sale proceeds from Vodafone's 10 per cent stake in leading Indian mobile operator Bharti Airtel Ltd, valued at about pound 1.2 billion.

Vodafone had reported net debt of pound 20.2 billion as on September 30, 2006. Since then, the group has received proceeds from sales of minority stakes in Proximus and Swisscom mobile of two billion euros and Pounnd 1.8 billion respectively.

S&P further added that Vodafone's exposure to emerging market risk, as well as growth opportunities, has already materially increased following its investment in Turkey and this exposure remains manageable.

Moreover, Vodafone's operating margins and cash flow generation will remain predominantly weighted by its European businesses, however, even if the bid in India is successful, it added.

Based on current information, S&P said that a change in the ratings and outlook on Vodafone was unlikely, while assuming that the transaction proceeds broadly in line with press reports and that a more detailed review of the Hutchison Essar business proves satisfactory.

However, whether or not Vodafone acquires a controlling stake in Hutchison Essar, the level to and manner in which the group is prepared to bid will be an informative test of its acquisition criteria and of the implementation of its revised financial policy, S&P said, adding that these considerations could be important future rating drivers.

• The race for Hutch-Essar