BOUYGUES - Following conversation with Bouygues
What does Bouygues say?
Bouygues's Board has decided to reject Altice's approach on Bouygues Telecom, refusing to enter into negotiations, on the back of three main reasons:
1) Bouygues sees a great stand-alone future for Bouygues Telecom, both in the short term (competitive advantage in 4G) and in the long term (telecoms to return to growth), as detailed in our US roadshow feedback a few days ago. The group has officially said it targets EBITDA margin of at least 25% by 2017 i.e. meaning significantly more than EUR1bn;
2) Altice's offer presents significant execution risk, in particular antitrust, that 'should not be borne by Bouygues' and Altice has not provided a 'fully satisfactory response regarding this important matter'. This is a key point in our view - see below;
3) the merger would inevitably come with impacts on employment.
The key point here in our view is the comparison between:
- On one side, the risk/reward of the stand-alone strategy. With an EBITDA target of significantly more than EUR1bn by 2017 and growth thereafter, Bouygues management probably values Bouygues Telecom at EUR8-9bn on a stand-alone basis. It probably puts a relatively low risk of execution on this strategy because it expects to see the benefits of its leadership in 4G and of its cost cutting plan to show results quite soon: potential for ARPU to rebound from H2 2015 and for EBITDA to grow to EUR800-900bn in 2016;
- On the other side, the risk/reward associated with the Altice offer, with a valuation of EUR10bn+ but a risk that the deal would be blocked after a year of antitrust review. In the meantime, Bouygues Telecom would have lost customers, employees and the trust of its suppliers, as it would have been considered 'gone' by everyone (cf. T-Mobile US / AT&T a few years ago). Such losses would be particularly damageable for Bouygues Telecom, which is still fragile and cannot afford to break its improving momentum.
To summarise, the Board has considered that the gap is not compelling enough between EUR10bn with a high risk of execution (as assessed by Bouygues) and EUR8-9bn with a lower risk of execution (and, in any case, the potential to reopen the M&A option later on).
Could a deal still happen?
Bouygues is not formally closing the door, saying that it would look at any new offer - as it has done in the past a number of times. However, the group's wording implies that the main sticking point is not the price but the antitrust risk that Altice has not proven that it is ready to bear itself.
Could that mean that Bouygues could change its mind if Altice came with a large break-up fee? Possibly, but our impression is that it would have to be very large indeed. Unless Altice is 100% sure that the deal would be approved by antitrust authorities - in which case it could be ready to offer a very high break-up fee - a deal seems difficult in the short term.
Still, longer term (e.g. one year from now), we would certainly not rule out that the M&A option comes back on the table, with either Bouygues or Numericable-SFR in a tougher spot:
- One scenario could be that Bouygues Telecom continues to gain market share and Numericable-SFR continues to lose market share; this could put renewed pressure on the latter to do the deal and Bouygues could get an even better offer at that point.
- Another scenario could be that Bouygues Telecom fails to gain traction. Management has been clear in the past that, in such a case, it would be more open to consider a sale, but that would probably be from a position of weakness compared to today.
Overall, we therefore continue to believe that there is a significant probability of consolidation in France but probably more in 2016+ than in the short term.