TheChek News Flow

On Friday, Renault’s board is expected to change its cross-shareholdings with Nissan so they might better reflect the power balance in the two carmakers’ 16-year-old alliance. And not too soon.

When the French state raised its stake in Renault in April, it stoked Japanese concern about the partnership agreement. The alliance is a good model of how to reach scale in an industry where consolidation is difficult. The current incident shows why such alliances should not be cemented with cross-shareholdings.

The share structure is a legacy of the French carmaker’s bailout of its larger Japanese peer. In 1999, Renault invested $5bn in return for 37 per cent of its highly indebted rival. Carlos Ghosn arrived in Tokyo and turned the company round; he is now in charge of both companies. The alliance grew one project at a time. The cross-shareholding were increased as a symbolic gesture. Renault now owns 43 per cent of Nissan, which owns 15 per cent of Renault (the two companies also have an alliance with Daimler, involving smaller cross-holdings).

Alignment of interests (“skin in the game”) is the reason given for holding partner’s shares. It is a bad one. It adds legal complexity because of the web of national regulations on shareholdings, voting rights and operational control. Management needs to focus on the successes of shared projects. It is not clear how swapping shares adds to the commercial incentives already provided by investment in those projects. Cross-holdings can magnify issues associated with state control. France’s meddling in Renault has become a distraction for the alliance: the state forced Renault to adopt the Florange law (more voting rights to long-term shareholders) which has pushed Nissan to seek voting rights.

Alliances offer the benefits of scale to an industry where consolidation is blocked by family and state shareholdings. Partners swapping shares increase the risk of distracting power struggles.

The Renault-Nissan alliance offers a good model, but for the tangle of shareholdings. Renault’s board should agree to sell down its share in Nissan to protect the alliance.

We are attracted to Peugeot because we see significant upside to consensus EPS

expectations for 2017e. Our forecast of EUR2.48 indicates a doubling of operating

EPS from 2015e and is c30% ahead of consensus, driven by a reduction in net

financial expenses, lower taxes and the benefits of restructuring. From a strategy

perspective, we have also just turned positive on the autos sector with an upgrade

to overweight

* Adding Credit Agricole S.A. (ACA FP; Buy; CP EUR11.10; TP EUR14.70)

We are attracted to Credit Agricole S.A. (CASA) for two key reasons. First, the recent IPO

of Amundi has provided a clearer line of sight on the valuation of ‘core CASA’ (a 2017e

P/E of 6.9x) and second, we believe funding costs could be significantly reduced given

that CASA is already well above its TLAC targets.

* Removing Air France-KLM (AF FP; Buy; CP EUR6.39; TP EUR8.45)

We remove Air France-KLM from the portfolio because we believe that Peugeot

offers a more attractive investment opportunity.

* Removing Erste Group Bank (EBS AV; Buy; CP EUR28.76; TP EUR33.00)

We remove Erste Group Bank from the portfolio because we believe that Credit

Agricole SA offers a more attractive investment opportunity.

* Performance

Since inception on 5 January 2010, the Europe Super Ten portfolio has returned

+70.1% versus a return of +29.7% for MSCI Europe. Year-to-date, the portfolio has

returned 0.9% versus a return of -0.8% for MSCI Europe. These performance figures

are in USD terms, priced at 4 December 2015 and are calculated by Euromoney.

* Super Ten rules

Adjustments to the portfolio will be triggered by changes to analysts’ stock ratings or

strategists’ themes. Changes may also be made if better ideas become available,

e.g. through the publication of new research or through movements in share prices.

* EM-exposed stocks are now seeing relative earnings upgrades while DM consumer exposure is seeing deteriorating earnings momentum Despite the continued underperformance of EM exposed stocks, relative earnings momentum across most of our EM baskets has been improving over the last 3M. As we show in the scatter charts on Page 10, most of our EM baskets are now seeing relative earnings upgrades with improving momentum (i.e. the baskets in the top right quadrant of the right-hand chart). On the other hand, stocks where relative earnings revisions trends are deteriorating include DM consumer, domestic UK, Eurozone exposure and stronger $ beneficiaries baskets. 

* China consumer / Corporate exposure are the cheapest baskets on relative N12M PE vs history; DM consumer the most expensive The cheapest baskets in the market on 12m forward PE versus its 8Y history include China / EM consumer and corporate exposure. On relative trailing PBV vs its own history, Russia and US exposure screen as the cheapest baskets. The most expensive baskets on the other hand on 12m forward PE %tile include China investment, DM consumer and weaker EUR beneficiaries and US consumer, Eurozone and stronger $ beneficiaries on relative trailing PBV.

RBC

AIR FRANCE +1% Traffic data strong, load factor better, flight diverted.

ALTICE +5% Short-Interest near highs, positive read from ORANGE/BOUYGUES

BOUYGUES +5% Reports that ORANGE in talks to buy Media Units

DAI/VOLVO -1% ACT cuts Class '8 2016 production forecasts overnight

ENQUEST +1% Production update inline, cost cutting programme on track.

EURONEXT -1% Fined €5m by AMF for '09 HFT pilot, will appeal

ILIAD +3% Positive read from BOUYGUES/ORANGE announcement

KLEPIERRE +2% Confirmation they will replace EDF in the CAC40 on Dec 21st.

NUMERICABLE +4% Positive read from BOUYGUES/ORANGE headlines

ORANGE +3% Reports in talks to buy BOUYGUES TELECOM media unit

PUBLICIS -1% Reports that OMNICOM said to win most of P&G's N.America biz.

SWISS RE 0% Investor day inline, ROE targets as expected, dull.

JEFFERIES

Bouygues +4% Orange targeting telco unit?

Galapagos +5% +ve interim Ph II data for filgotinib in Crohn's

Orange +1% spec to buy Bouygues Tel and TF1

Publicis -3% spec have lost large part of P&G N Amer biz

Tel Italia -2% Orange may not be bidding in the end

TF1 +5% part of the Orange deal?

BoA MERRILLS

ML

ENQUEST - 15-20% cut in FY15/16 opex, YTD production in line w guidance...+5% BOUYGUES - Spec Orange to buy EN FP Telco, turned down EUR 10bn offer prev+4% KLEPIERRE - To be added to CAC 40 Index as of Dec 21st Euronext says......+3% FRENCH TELCO - ORA/EN FP tie up would be positive for all, pricing etc....+3% ORANGE - Spec co to bid for Boyugues Telco & Media unit, consolidation +ve+2% SCOR - Spec Sampo May Still Be on M&A Prowl After competitor deals........+1% ADIDAS - We UPGRADE to Neutral in year ahead piece, PO to EUR 91 from 64..+1% STEINHOFF - We INITIATE with a BUY rating, PO EUR 6.50 (ZAR 97)...........+1% HEADLAM - Trading update more or less in line with a slightly softer H2...u/c EON - Co does not need further provisions in power generation unit, BZ....u/c AIRBUS - Spec hired bankers to explore sale of Vector Aerospace Unit......u/c SWISS RE - RoE and economic net worth growth targets all in line w prev.-0.5% T.ITALIA - Spec of ORA for Bouygues Telco may dampen TI bid spec..........-1% EDF - Euronext says to be removed from CAC 40 Index on Dec 21st...........-1% VICTREX - Numbers small beat and future payout solid but no special div...-1% SMURFIT KAPPA - We DOWNGRADE to Neutral, PO down to EUR 27 from 32.50.....-1% GN STORE NORD - CFO resigns unexpectedly, 7.2% short base will support....-2% MONDI - We DOUBLE DOWNGRADE to UNDERPERFORM, PO to 1,200p from 1,686p...-2-3% PUBLICIS - Loses bulk P&G's US business to Omnicom, big contract to lose-2-3%

CREDIT SUISSE

Air France +1% Seat occupancy rate hurt by Paris attacks less than exp

Bouygues +5/6% ORA said to be in dis to buy Bouygues telco & media assets

Gameloft +5% Vivendi raises stake to 26.7%, plans to continue

GN STORE -1% CFO Anders Boyer resigns

Headlam M/P Trading update reads fine, as expected H2 has slowed

Miners -2/3 Continuation of weakness in commods from US close

Numericab +5% Spec of french mobile consolidation helpful for pricing

Oils UNCH Most of move happened in mkt, ADRs were flat

Orange +1/2% Said to be in disc to buy Bouygues' telco & media assets

Publicis -2/3% P&G shifting alomost all US business to Omnicom

Swiss Re -1% Invester day statement out, inline, capital remains unch

Tel Italia UNCH T Italia had been mentioned as possible target for ORA

Unilever +0.5% u/g to neutral on improving competitive structure

Victrex -2/3% Sales inline 263.5mln, pbt small ahead of cons at 106.4mln

Vivendi UNCH Vivendi raises stake to 26.7%, plans to continue

INVESTEC

EUR

* AIRBUS-may sell Vector unit for more than $800m (Reuters).................U/C

* AIR FRANCE-Nov occupancy -0.9%. Flight diverted o/n after threat..........U/C

* DBK-Japan seeks penalty against unit for improper handling of info........-1%

* ELUX-rivals LG & Samsung may step in to buy GE unit after blocked deal....-2%

* EON-no new impairments necessary says CFO (B-Z).........................+0.5%

* NOVARTIS-positive results from young person blood cancer drug.............+1%

* ORANGE-said in early talks to buy BOUYGUES(+5%) telco/media assets......+1.5%

* PUBLICIS-loses P&G N America contract to Omnicom..........................-3%

* UNIBAIL-sells Neuilly-sur-Seine building for €267m......................+0.5%

* VIVENDI-raises Gameloft stake 26.7%(25%),still doesn’t rule out t/over....U/C Other

* Investor Day/Capital Mkt Day: SWISS RE, THYSSEN

* Ex-Div: ADP, THALES

UK

* AMEC FW small contract win, Scot underground cable........................unch

* ANGLO AMERICAN investor day today - has been div cut spec all over press

* BRC data poor November, -0.4% lfl BUT ex food lfl +2.6% (v +2.1%)

* CAIRN +ve read across from ENQUEST ops update below........................+1%

* ENQUEST ops update Kraken on target and under budget for H1 '17............+5%

* GW PHARMA +ve test results from epilepsy drug Epidiolex AH in US...........+2%

* HEADLAM Pre Close, slowdown in H2(I/L) remains on track to meet FY.........-1%

* HELLERMANTYTON all regulatory and competition clearances achieved..........+1%

* LAMRELL Investec appointed joint broker

* TREATT TET results ahead of expectations, no change to FY16................+2%

* VICTREX FY rev +4%, gross margin -80bps, sees challenges for FY16.......-2/-3%

* VODAFONE to sell at least 10% stake in Indian unit via IPO - CNBC........+0.5%

* WOOD GRP Secures new ConocoPhillips(Aus) contract. No financials..........unch

Ahead of the speculated Renault board meeting on Dec-11th, we take a quick look at the potential scenarios unfolding in the Renault-Nissan saga. Short term, we fear that less rather than more will change in the Alliance. But we remain attracted to the fundamentals and would buy on weakness

3 potential scenarios are likely to be discussed at Renault’s board meeting on Friday It is increasingly clear that the Alliance structure needs to change before the French government’s double voting rights kick in on 1st April 2016. Any changes require board approval first, and we believe 3 scenarios will be discussed at Renault’s board meeting on Friday: 1) keeping the status quo but stakeholders limit power through binding agreements, 2) changes to the crossshareholding agreements, allowing Renault to free up EUR3.5-7.5bn of cash from its Nissan stake (equivalent to a EUR12-27 per share special dividend or even M&A?) and 3) a full blown financial merger.

Longer term only a full merger makes sense, we see 30-40% upside in that scenario After 15+ years of debate, the stars may finally be aligning for a full merger of Renault & Nissan. As the industrial partnership grows through the roll out of the CMF shared platform, the profitability of the companies will converge by 2017/18e, providing a more equal footing for a full combination. At current share prices, a nil-premium merger of Renault-Nissan would actually result in a 50:50 ownership split between Renault and Nissan in the combined NewCo. Even if more by luck than judgement, after 16 years, the stars are now finally starting to align. If not now, when?

Back to fundamentals…there is still value. While the potential outcomes are still widespread, on the balance of recent newsflow, its looking increasingly likely that less rather than more change will come out of the Renault board meeting on Friday. We would therefore exercise an element of caution this week, not all news would be good news. However, looking through this noise, our base case of EUR118 assumes no change to the structure of the Alliance. We continue to like the fundamental drivers of the Renault equity into 2016 (product cycle, mix tailwinds, sales to partners, EU exposure) and would buy on weakness

Bloomberg reported last night that Orange is in early discussions to buy Bouygues’ telecom and

media assets. Coming one week after Reuters reported that Orange had hired advisors to examine

M&A opportunities in Europe, it might well be a non-story (i.e., Orange could be simply assessing

its different options). This is especially given that Orange has been stating since the beginning of

the French M&A saga that it would not lead consolidation in the country.

* Such a deal would indeed make strategic sense…

While we see little benefits in cross-border M&A, we think there is large upside potential from incountry

consolidation. In particular, a takeover of Bouygues Telecom would remove the attacker in

the fixed-line market – a major positive for all French telcos. Such a tie-up should lead to

substantial cost and capex synergies (in particular in the context of fibre deployment) and see

Orange follow the recent trend of telco-media deals. For Bouygues, this would represent an ideal

opportunity, coming at a time when commercial momentum is strong.

* …but would face high regulatory hurdles

A combination of the two telecom businesses would raise substantial concerns in terms of market

concentration and employment in particular. Consequently, a deal would likely only go through with

large remedies. This would likely require the involvement of other players, which brings further

uncertainty. As a result, we see a low probability of such a deal materialising at this stage.

* Stock implications – potential positive for all French stocks

The market might start today pricing in a modest probability of such a deal happening, benefiting

Bouygues, Iliad, Num-SFR and Orange, in that order. We are Outperform on Iliad (TP EUR220),

Neutral on Orange (TP EUR16) and Bouygues (TP EUR32), and Underperform on Numericable-

SFR (EUR39).

Bloomberg reported last night that Orange is in early discussions to buy Bouygues’ telecom and

media assets. Coming one week after Reuters reported that Orange had hired advisors to examine

M&A opportunities in Europe, it might well be a non-story (i.e., Orange could be simply assessing

its different options). This is especially given that Orange has been stating since the beginning of

the French M&A saga that it would not lead consolidation in the country.

* Such a deal would indeed make strategic sense…

While we see little benefits in cross-border M&A, we think there is large upside potential from incountry

consolidation. In particular, a takeover of Bouygues Telecom would remove the attacker in

the fixed-line market – a major positive for all French telcos. Such a tie-up should lead to

substantial cost and capex synergies (in particular in the context of fibre deployment) and see

Orange follow the recent trend of telco-media deals. For Bouygues, this would represent an ideal

opportunity, coming at a time when commercial momentum is strong.

* …but would face high regulatory hurdles

A combination of the two telecom businesses would raise substantial concerns in terms of market

concentration and employment in particular. Consequently, a deal would likely only go through with

large remedies. This would likely require the involvement of other players, which brings further

uncertainty. As a result, we see a low probability of such a deal materialising at this stage.

* Stock implications – potential positive for all French stocks

The market might start today pricing in a modest probability of such a deal happening, benefiting

Bouygues, Iliad, Num-SFR and Orange, in that order. We are Outperform on Iliad (TP EUR220),

Neutral on Orange (TP EUR16) and Bouygues (TP EUR32), and Underperform on Numericable-

SFR (EUR39).

* Still positive on the sector

We believe the GDS sector is well-placed in 2016, supported by solid airline capacity

growth plans and progressive shareholder return policies. The Lufthansa dispute and

potential for terrorist incidents to sap travel demand are risks to watch - partly as a

result we prefer US exposure over Europe. We think Travelport could be the biggest

relative gainer, given its improving competitive position and deep sector discount. See

our Travelport initiation for details.

* Looking through the noise on share gains

Market share stats in 2015 showed Amadeus taking share and Travelport losing; but our

analysis shows a more nuanced underlying picture. Adjusting for the move of over 20m

low-margin bookings from Travelport to Amadeus (BofAML estimate) following TVPT's

divestiture of Orbitz, Amadeus’ market share has been flattish (-0.1%), Travelport was

not dissimilar (-0.3%) while Sabre has taken 40bp of share. Netting out Amadeus’

growth in Korea too following the consolidation of TOPAS, Amadeus would be growing

bookings around 1.5% YTD, Travelport 3% and Sabre 6%.

* A study in pricing – Travelport rising

Similarly to share, pricing has a number of factors which obscure underlying trends – we

control for Orbitz, Abacus, FX, upsell (like TVPT’s payments biz), and regional mix. On

this basis, we estimate Sabre’s pricing is down 1.1% - consistent with it being a share

gainer, and that it has less to lose from being aggressive in high-priced EMEA. In

contrast, Travelport is showing the most positive trends at +1.5%. This lends credence

to management’s view that 1) it is being price disciplined, 2) rich content and branding

is beginning to have a meaningful impact on its pricing.

* Capital allocation story – Sabre set to be most proactive

A key attraction of investing in the GDS sector is the combination of strong cash

generation and shareholder friendly boards. We think Sabre is likely to be most proactive

in 2016-17 and should continue to buy back shares - we now model SABR to buy back

c.30% of outstanding shares in the next 5 years. At 4x EBITDA (2015E) Travelport

should continue to de-lever and lower interest cost (plus pay its 2% dividend). Amadeus

in theory has the biggest opportunity as it has the lowest leverage (1.6x trailing EBITDA,

pro forma for the Navitaire acquisition), but it seems more focused on M&A right now

as a way to bolster R&D for the push into hotels and airport IT. Nonetheless, we assume

all three will ultimately re-lever in the long term to 3x EBITDA (via buy-backs), meaning

EPS CAGR’s through 2020 of 25%, 22%, and 19% respectively for Sabre, Travelport and

Amadeus. Without buybacks, this would fall to 15%, 11% and 8% respectively.

* Buy Travelport, Sabre - 54% and 18% upside respectively

Travelport has historically been a laggard in market share and innovation, but we see

signs that both are changing - and at 12x FCF ('16), investors are amply compensated by

the valuation. It is now our top pick in the sector. We continue to like the Sabre as it

shifts to capital returns focus ($35 PO). We stay Neutral on Amadeus, as a combination

of slowish GDS growth and a valuation premium could keep the shares range-bound.

CGG’s somewhat forced evolution has accelerated in recent weeks with its exit from the

commoditised marine seismic market, leaving it focused on higher ‘value-added’ businesses in

Sercel and GGR, and its planned EUR350m rights issue, announced yesterday. Our SotP-based

TP falls to EUR2.8/sh, in-line with the current share price.

* Is EUR350m enough? For the next two years, yes, but leverage remains high

With the market likely to remain weak for at least 2016 and most likely 2017, and risks still on the

downside, we think that it is better that any capital raise seeks to cover cash requirements for

downside scenarios – which we believe CGG has attempted to do with its capital raise. We think

that the EUR350m capital raise, together with existing liquidity, should give the company a buffer

over and above what is needed by restructuring costs (USD270m) and loan maturities (USD70m)

by the end of 2017. However, leverage will remain high and covenants (not yet disclosed) may still

be a concern in the medium-term.

* Cash neutrality the key target, and a possibility: MC discipline still needed

Post the equity raise, we see one of the most important criteria for the company being whether it

can be FCF neutral or better at the trough; this rests on Sercel, GGR and multi-client – these

divisions have to pay the interest and corporate bill. With Sercel likely to struggle until demand

recovers, and GGR a steadier performer, much rests on multi-client performance: pre-funding

needs to be robust. We expect CGG to fall just ~USD65/USD35m short of FCF neutrality in ‘16/’17

ex restructuring and working capital movements.

* Valuation – some longer-term support, but leverage means it’s very sensitive

Given the elevated leverage, any valuation exercise today is very sensitive to assumptions around

longer-term margin/revenue profiles – particularly at Sercel. Our base case DCF is EUR2.8/sh, but

rests on a medium-term recovery at Sercel that will not be evident in the near-future. We like

CGG’s profile post restructuring, but remain concerned over the exploration outlook. Reiterate U/P.