Scenario analysis suggests dilution
Following numerous reports that ORA (OW) may consider an acquisition of TI (UW)
we present a detailed financial analysis of a potential deal. Fundamentally we see
little opportunity for Orange to create value since precedents suggest synergies
would likely be low whilst leverage constraints imply a material equity financing
component, suggesting a potential deal would likely be dilutive to NI/FCF for at
least 2 years. Finally execution risk would likely be high.
Potential Orange and TI deal: a tough sell. Reuters (1/12/15) has indicated that Orange
could make a bid for TI. Orange has denied this but it comes in the wake of comments
by Orange CEO in June 2015 that the company has a role to play in European telecom
consolidation. Our pro-forma analysis implies limited scope for value accretion.
Growth opportunities in Italy fixed comes with challenges. Our detailed analysis of
the Italian market shows clear potential for growth in domestic fixed given low
penetration/spend. However, this comes with challenges: low fixed line penetration is
largely explained by lower network investment historically. Capturing the potential
growth opportunity will therefore likely require heavy investments for some time. In
wholesale TI is dominant, owning the only infrastructure, but that advantage will likely
be diluted in dense areas as competitors roll-out their networks. On mobile we see
potential for recovery but no more than in other European countries.
EU roaming cut could legitimate cross-border deals. Retail roaming is due to
disappear by 2017 (see ‘EU Roaming: Wider implications’). Inter-operator roaming
charges beyond 2017 are yet to be decided, but are likely to fall, in our view. This raises
the risk that an OTT could potentially use a national wholesale deal with a disruptive
MNO as a way to enter all European markets, using bilateral roaming rates. Crossborder
cooperation could lessen this risk, as could potential consolidation.
EGM vote on 15 December. On 15 December TI ordinary shareholders will vote on the
conversion of saving shares into ordinary shares (a second EGM for saving shareholders
will occur on 17 December). At the 15 Dec EGM shareholders will also vote on whether
to provide four new BOD seats to Vivendi. Vivendi will need the support from other
shareholders so this presents an opportunity to gauge whether Vivendi is welcome.
Reiterate OW on Orange. Recurring press reports around Orange’s international M&A
ambitions are unhelpful, in our view, given we see limited prospect of value creation in
such scenarios. Nevertheless, we view ORA’s discount to the sector as unjustified given
4G superiority and under-appreciated co-financing economics drive our French 2016E
forecasts 2% ahead of consensus, per Fibreconomics and Network effects. Yesterday’s
reports of a potential ORA bid for Bouygues (Le Monde) are also supportive, potentially
bringing faster 4 to 3 mobile consolidation. See our note, Potential bid for Bouygues:
analysis, published today. We also reiterate our UW on TI.