TheChek News Flow

We introduce the first version of our 'Best Business Models' list in Europe, which highlights 25 leaders from across each industry group for the long-term investor. The companies in the list are large, leading franchises in their sectors, with high and sustainable RNOA and strong balance sheets. They have been chosen through a two-part selection process – a quantitative screen and qualitative input from our analysts.

The median stock in our 'Best Business Models' basket has outperformed MSCI Europe by 190% over the past eight years and also consistently outperformed European value and, more relevantly, growth indices since 2009.

We assume E10bn will be paid for B.T.: E6bn in cash and E4bn in existing Orange shares (2.2% bought from the government diluted to 20.8% but still maintaining 3 seats on the BOD, 7.6% bought on the market), with the bulk of B.T. subscribers, spectrum, mobile antennas, shops and employees of the related assets bought by lliad and Numericable for E4.2bn and E2.6bn respectively, which leaves E2.7bn for Orange. Resulting debt/EBITDA would be 2x pre-market repair benefits for Orange, 3.7x for NUME and 2.7x for Iliad, with market shares balanced: Orange at 39% in mobile post-paid vs. 37% now, NUME at 34% vs. 29% and Iliad at 25% vs. 18%, which is extremely important for the health of the French market: reaching its 25% l/t target through the acquisition and needing to protect its new high value customers should mitigate Iliad’s aggressiveness but not kill its maverick spirit, which is precious to regulators. Spectrum shares – 40-33-27% resp. (37-32-32 low frequencies) – would mirror mobile market shares, allowing Iliad to grow further.

We estimate cumulated E1.3bn EBITDA will be generated by B.T.’s assets once sold to the three players vs. E0.9bn B.T. EBITDA guidance for 2016. This implies a E0.4bn run rate of synergies, or E2.5bn NPV, to be added to the market repair benefit on the existing client base. Resultant post-synergies pre-market repair) EV/EBITDA paid would be 7.2x for Iliad, 7.5x for NUME and 9.8x for Orange, reflecting lower integration risks taken vs. the other two players. We see mobile ARPU trending to E23.4 by 2020 for Orange and NUME, 9% above our (pre-consolidation) models: 0.8/0.9% CAGR 2015-20, below French inflation forecasts, is consistent with Orange CEO commitment not to increase prices. We expect additional benefits from lower churn and handset subsidies, in line with Austria. We embody the related value creation in our target prices, assigning a 70% probability (given more visibility on the potential consolidation) to consolidation. A government blessing could well be aimed at seeing Orange active in cross-border consolidation. Iliad/Xavier Niel are looking for assets outside France too. If France provides resources for expansion, a healthy French market is needed by all players.

We see 13% upside potential to TP for Orange, 18% for Iliad and 44% for NUME, assuming 70% probability of consolidation. Should consolidation fail, upsides would be +3/-3/+39% respectively and, if it succeeds, +17/+26/+48%. We use DCF-based SOTP to derive our target price, with WACCs ranging from 7% to 13.3% (Orange’s African assets) and g from 0% to 5%. See details in the note. Risks: 1) consolidation talks stop, 2) M&A destroying value, 3) Orange/Iliad potential buyers in cross-border mergers. We argue consolidation should not affect Orange in the fibre roll-out because Iliad’s roll-out plans would be above Iliad’s plus Bouygues’ current ones.

The deal would make the combined entity the third-largest station group owner in the US, behind Fox and CBS.

The agreement, when announced, is expected to be put on hold because Media General has already pledged itself to Meredith Corp., one source said.

Still, Media General hopes the deal will put pressure on Meredith to settle the $60 million termination fee it negotiated with the company, sources said.

If Meredith doesn’t settle, in February it can force a Media General vote on its previously signed merger deal.

While Media General shareholders may reject the deal, it would delay the Nexstar sale — and Nexstar wants to close its deal in a New York minute.

The flurry of deals — first between Meredith and Media General and then between Nexstar and Media General — comes as station groups believe they need to get bigger to increase their bargaining position with cable providers.

Cable companies have been bulking up, and gaining the negotiating upper hand, through mergers.

Nexstar Chief Executive Perry Sook in 1996 founded the Dallas-based company that, if it buys Media General, will own and operate 114 TV stations.

As a poignant backdrop, the last scion of Media General’s founding family, J. Stewart Bryan III, died Saturday.

The 77-year-old was Media General’s chief executive from 1990 through 2005, and remained chairman until his death. Richmond, Va.-based Media General was founded in 1850.

Bryan’s death resulted from complications related to neck injuries sustained from a Jan. 15 fall, Media General said.

Media General’s shares on Monday closed down 1.8 percent, to $15.58.

Nexstar and Media General spokespersons declined to comment.

French telecoms billionaire Xavier Niel is exploring a move into the fiercely competitive British mobile market on the back of the proposed acquisition of O2 by rival Three.

Iliad, the French telecoms group controlled by Mr Niel, has approached Ofcom, the UK telecoms regulator, to express a “preliminary” interest in entering the market, according to people familiar with the situation.

A move to create a new UK mobile network operator would depend on acquiring telecoms infrastructure as a result of the £10.5bn the O2-Three merger, according to a person with knowledge of the situation.

The person added that antitrust authorities in Brussels were expected to force the combined group to sell or open its network to rivals as the market consolidates from four to three operators.

Iliad declined to comment.

Ofcom said that it did not discuss whether it had held meetings with companies.

Interest from Mr Niel’s telecoms group in the British market will worry rivals, given its record of offering low prices that deeply undercut existing offers.

The launch four years ago of Free, Iliad’s mobile offering in France, disrupted the market, leading to an intense price war that slashed profits among the existing three operators. Orange’s proposed acquisition of Bouygues Telecom is an attempt to reverse the effects of the introduction of the low-cost rival.

A similar deal is being proposed in the UK with the purchase of O2 by Three, the UK’s smallest mobile group, which is owned by Hong Kong’s CK Hutchison. If the deal were to go through, it would reduce the number of competitors from four to three.

However, the deal is set to be challenged in the next week by the European competition regulator, which will set out a range of objections given the potential loss of competition for customers as well as third-party mobile providers that use the two networks under wholesale contracts.

Margrethe Vestager, Brussels competition chief, has already raised strong objections to similar deals elsewhere on the continent.

Ms Vestager is likely to seek remedies that in effect lay the ground for the creation of another mobile operator by carving off parts, or guaranteeing access to, the network of the combined group, according to people familiar with the thinking at the EU regulator.

Iliad is not alone in positioning itself to take advantage of any changes, which would need to be volunteered by Hutchison to meet concerns that will be laid out in a statement of objections due in the next week.

British rivals such as Sky and TalkTalk are also hoping to be able to acquire the infrastructure in a forced sale, or at least the rights to use a defined share of the network owned by Three/O2 under agreed terms, as a means to launch more fully fledged mobile services.

However, Hutchison is unlikely to agree to creating a rival mobile network that would remove the consolidation benefits of acquiring O2, which is likely to mean weeks of negotiations between the two sides to find common ground.

The failure to agree terms forced a similar deal in Denmark to fall through last year.

Mr Niel’s interest in the UK is the latest sign of his ambition to expand beyond France. Iliad last year made a surprise offer to acquire a majority stake in T-Mobile US, the US telecoms business controlled by Deutsche Telekom. Mr Niel has more recently taken a stake in Telecom Italia.