(BFW) Actelion May See Other Suitors in Short-Term: Berenberg

Actelion May See Other Suitors in Short-Term: Berenberg
2015-06-08 09:18:29.848 GMT


By Allison Connolly
(Bloomberg) -- Shares extend gains, up as much as 8.6%, the
highest on record and the biggest intraday gain since June 16;
leads SXDP gainers.

* Berenberg (buy, PT CHF135) says reported bid of CHF160/shr
is justified, assuming an acquirer would substantially cut
R&D and G&A expenses, leading to valuation increase to
CHF162/shr
* Says a serious offer could come at a more substantial
premium of between CHF180-CHF200/shr
* Says Actelion has long been viewed as a takeover target, and
reported approach may encourage other players to come
forward with offers in the short-term
* NOTE: Earlier, Actelion Rises to Record After Report it
Rebuffed Shire Approach

For Related News and Information:
First Word scrolling panel: FIRST<GO>
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To contact the reporter on this story:
Allison Connolly in London at +44-20-3525-7043 or
aconnolly4@bloomberg.net
To contact the editor responsible for this story:
James Ludden at +44-20-3525-2645 or
jludden@bloomberg.net

(Citi) Vodafone & Liberty Global

* Vodafone confirms talks on asset swap — Vodafone has confirmed that it is in
the early stages of discussions with Liberty Global regarding a possible exchange of
selected assets. In what may be anticipating interest from the UK Takeover Panel,
Vodafone has also said that they are not in discussions concerning a combination of
the two companies but we do not believe this is necessarily a permanent state of
affairs. The negative reaction of the Vodafone shares suggests some investors find
an asset swap a rather half-hearted way to exploit the benefits of a possible
combination but it does focus on the major areas of synergy and more may come of
the discussions in time in our view.

* Which banana to swap for which? — The companies have operational overlap in
seven Northern and Eastern European countries (Figure 3).
– Germany to Vodafone? — Relative size locally and preservation of tax assets
(see Time to Ring the Liberty Bell?) point to Vodafone as the acquirer in
Germany.
– UK to Liberty? — Liberty is bigger than Vodafone in the UK and Ireland in
EBITDA terms (though smaller by revenue) and its Virgin Media operation could
be instrumental in improving the profitability of Vodafone’s low margin UK mobile
assets, partly by bringing its MVNO on net. Liberty also has sizeable UK tax
losses. However, Vodafone may wish to retain part of the C&W legacy assets to
serve its enterprise customers. We see the largest synergy here.
– Netherlands to Liberty? — Liberty has the larger of the two’s assets in the
Netherlands and the possibility of addressing synergy across the border with
Telenet in Belgium.

* How to address an even division — This split in Northern European would
advantage Liberty with Vodafone passing over £2.6bn in EBITDA (post 50% of the
synergy on our numbers - Figure 3) while Liberty hands back less than half that at
£1.25bn. However to make up the difference, in our view Liberty could include its
assets in Eastern Europe and Switzerland (possible Austria too).

* Switzerland and Eastern Europe — Liberty’s asset in Switzerland, while cable
only, as a well invested fixed line player has the potential to take part in
convergence lines consolidation there in our view and also borders Vodafone’s
assets in Italy and Germany. For Vodafone the Eastern European assets, while only
modest in size, could make its assets there more saleable by turning them into
converged operators. In combination these would make the trade more even with
Liberty notionally providing £2.3bn in EBITDA for Vodafone’s £2.6bn, leaving
matters of capital intensity and tax aside for now.

(Citi) Diageo - 3G Bid Possibility Could be Catalyst for Change and Outperf

* 3G weighing bid for Diageo, according to Brazilian media — An article on Veja
(6 June) suggests that 3G Capital is in the early stages of looking into a bid for
Diageo. It is difficult to say whether the report is credible, but Diageo seems the sort
of target 3G would consider, in our opinion. In any case, we doubt anything would
happen soon, and indeed it may not happen at all. But at the very least we believe
the potential for a take-out should (1) increase pressure on management to
accelerate change and consider actions that would unlock shareholder value and
(2) underpin the stock’s valuation.

* Diageo seems the sort of target 3G would consider — 3G looks for strong
brands, cost cutting opportunities and, more broadly, potential to unlock shareholder
value. Diageo offers several global billion-$ brands, a strong route-to-market across
the world, opportunities to unlock value, in our view, and it comes from 2 years of
weak operational performance. On cost cutting, while Diageo appears reasonably
efficient already, we have no doubt that 3G, with its ZBB approach, would be able to
extract further savings, but probably not on the scale of other deals it has done.

* ABI-SAB less likely? — IF 3G were to acquire Diageo, we think it is likely that they
would sell the beer assets to ABI. In this scenario, we believe ABI-SAB would be
much less likely, for sure in the short term, but this is all hypothetical of course.

* The threat of a take-out increases pressure on Diageo management — In this
note we go through some of the actions mgt could and maybe should consider to
restore confidence and/or unlock shareholder value: (1) sell non-core assets, (2) set
performance targets, (3) accelerate cultural change, (4) more cost savings, (5)
consider what to do with MH stake, (6) raise balance sheet gearing to buy back
shares, (7) communicate a plan for beer, (8) review some senior mgt positions.

* We reiterate Buy – In addition to the above, we believe Diageo is undervalued
(14% PE discount to EU staples), it’s an excellent business for the long term and we
expect an operational improvement in F16. We have had to cut our EPS by ~3.5%
however, mostly on FX (pg 10). As a result, we have lowered our target to 2,200p.

(BN) U.S. Billionaire Political Rivals to Fight Israel Boycotts (1)

U.S. Billionaire Political Rivals to Fight Israel Boycotts (1)
2015-06-08 07:41:05.965 GMT


(Updates with Netanyahu-Hollande conversation in 8th
paragraph.)

By Calev Ben-David
(Bloomberg) -- One donated more than $100 million to the
Republicans, the other has been the Clintons’ biggest backer.
Now billionaires Sheldon Adelson and Haim Saban, split on U.S.
politics, have united to fight boycott threats against Israel.
Adelson and Saban hosted a conference of pro-Israel
business executives and activists over the weekend in Las Vegas
to begin an initiative aimed at countering the growing threat of
international sanctions against Israel.
“That he’s a Democrat and I’m a Republican has really very
little to do with it,” said Las Vegas Sands Corp. founder
Adelson, who holds the 25th slot on Bloomberg’s Billionaires
Index, in a joint interview with Saban on Israel’s Channel 2 on
Saturday. While you can “rest assured” the two men will not be
supporting the same person in the 2016 presidential election,
Saban said, “when it comes to Israel, we are absolutely on the
same page.”
Israeli Prime Minister Benjamin Netanyahu has identified
the global trend to boycott, divest and sanction Israel over its
policy toward the Palestinians, known as the BDS movement, as a
major threat.
The boycott issue gained new prominence after Stephane
Richard, chief executive officer of Orange SA, said on Wednesday
that the Paris-based telecom company would end its licensing
deal with Israel’s Partner Communications Co. “tomorrow” if he
wasn’t concerned about legal repercussions. Richard later
apologized for his comments, made in response to a question over
a threatened boycott of Orange’s Egyptian subsidy, Mobinil, and
said they weren’t motivated by political concerns.

‘Blatant Lie’

The Israel-born Saban, who owns a controlling stake in
Partner, called Richard’s clarification “a blatant lie.”
“Any company that chooses to boycott business in Israel,
they’re going to look at this case, and once we’re done, they’re
going to think twice about whether they want to take on Israel
or not,” he said.
French President Francois Hollande spoke with Netanyahu
late Sunday and reiterated his opposition to boycotts of Israel,
according to a statement from Netanyahu’s office. Richard will
visit Israel in the coming weeks to reaffirm Orange’s commitment
to continue doing business in the country, the Haaretz daily
said Monday, citing French media.
BDS supporters say their tactics are the only effective
means of getting Israeli to stop building West Bank settlements
that most of the world views as illegal under international law,
and an impediment toward peace with the Palestinians.
Israeli officials view the BDS movement as part of a
campaign by the Palestinians to delegitimize their country. West
Bank settlements are not the real target of BDS supporters “but
our settling of Tel Aviv, Beersheba, Haifa, and of course,
Jerusalem,” Netanyahu said on Sunday.

Anti-Boycott Law

South Carolina on Thursday became the first U.S. state to
enact a new law designed to counter Israel sanctions. The
legislation prevents public bodies from doing business with
those engaged in the “boycott of a person or an entity based in
or doing business with a jurisdiction with whom South Carolina
can enjoy open trade.” Other states are weighing, or in the
process of approving, similar measures.
Adelson and Saban’s financial muscle and political
influence may boost efforts to counter the BDS movement and
score some individual successes, said Gadi Wolfsfeld, political
science professor at the Hebrew University of Jerusalem. It
won’t be enough to counter the larger trend of Israel’s
increasing diplomatic isolation, he added.
“If they sponsor serious research which comes up with
damaging facts that can hurt the legitimacy of the BDS movement,
and publicize that among the world’s political and business
elites, that can have an effect,” Wolfsfeld said. “But the
overall political movement, related to the general feeling that
Israel has no intention of ever leaving the territories and the
international community’s growing frustration over that, is not
going to be stopped.”

Blames Netanyahu

Israeli lawmaker Isaac Herzog, head of the opposition
Zionist Union party, said Netanyahu’s policies must share some
of the blame for the tide of international condemnation.
Pushing back against the sanctions movement requires “a
strong and very close connection with the administration in
Washington, and a diplomatic initiative to alter our
situation,” Herzog said Sunday on Israel Radio. “Netanyahu has
failed at both.”
Some members of Netanyahu’s Likud party and other factions
in his government oppose any concessions to the Palestinians.
One such politician, Education Minister and Jewish Home party
leader Naftali Bennett, said Sunday that the best response to
the BDS movement was building more Jewish settlements in the
West Bank.
“We will attack our attackers,” Bennett said at a
conference in Herzliya, north of Tel Aviv. “We will boycott our
boycotters.”


For Related News and Information:
Orange CEO Richard Says He’s Sorry About Israel Controversy
Billionaire Saban Assails Orange Plan to Pull Brand From Israel
Israel Risks EU Settlement Label Threat as Boycott War Heats Up
Top Israel News: TOP IS <GO>
Top Government News: TOP GOV <GO>
Top Stories: TOP <GO>
Israel Daybook: NI ISRAELDAY<GO>

--With assistance from Jonathan Ferziger in Tel Aviv.

To contact the reporter on this story:
Calev Ben-David in Jerusalem at +972-2-640-1105 or
cbendavid@bloomberg.net
To contact the editors responsible for this story:
Alaa Shahine at +971-4-364-1053 or
asalha@bloomberg.net
Jack Fairweather

(BofA-ML) Telco Conf. Feedback : French Names

France: both Iliad and Orange minimised the likelihood of consolidation in
the short term, with spectrum auction details to be announced shortly. In our
view, the current equilibrium is not sustainable, and Altice has clearly
expressed its ambitions to play an active role in Europe with an
“underlevered” balance sheet in France, but the bid-offer spread with
Bouygues needs to be closed.

Orange clarified its M&A strategy. Its focus remains convergence deals in
the markets where it was present, while cross-border deals in Europe could
make sense but were not on the agenda, with a focus on increasing
exposure to Africa, flagging a very fragmented market with over 200 different
operators.


>>> Iliad
Reiterate Buy, mid-term valuation in in line at 12.4x EV/OpFCF and 5.4% FCFE
despite a superior growth. Iliad’s message remains bullish on a number of fronts:
1) pace of net additions in broadband with solid share of additions in Q1, 2)
traction in mobile with leading share of additions every quarter since launch in
2012, and better customer mix, and 3) progress on mobile network roll-out that
drives better quality but also better economics. Guidance is for >10% EBITDA
growth for the full year 2015, however Iliad expects top line growth coupled with
benefits of the migration of traffic to its own network to have positive benefits on
margins as early as H1. We forecast with 10.4% YoY EBITDA growth in H1. We
expect Iliad's roaming bill to Orange to remain stable YoY (higher coverage with
950 sites in Q1, offset by higher subs base and usage), however we see roaming
costs declining c 100mln in H2, which we expect to translate into 22% EBITDA
growth in H2.
Thomas Reynaud, Deputy CEO and CFO
* Good commercial momentum… Iliad’s management insisted on the current
good commercial momentum driven by service and product innovations (4k
box, roaming etc.). Mobile base mix is improving with higher share of €20
offers vs €2 while mobile market share of net adds have consistently
remained above 65% over the last 13 quarters.
* … to translates into EBITA growth: Mobile contribution expected to turn
positive as of H1 due to sustained top line growth and higher traffic offloaded
to own network. Progress on mobile network roll-out drives better quality but
also better economics. Guidance is for >10% EBITDA growth for the full year
2015, however Iliad expects top line growth coupled with benefits of the
migration of traffic to its own network to have positive benefits on margins as
early as H1.
* M&A “a nice to have but not a must have”: Iliad has currently no plans for
M&A but remains open to opportunities. Iliad is looking at maverick in market
where pricing arbitrage is possible and where Opex and Capex are
undermanaged. Iliad think it has specific and efficient vision on cost
management (online sales, simplicity of offering) which can be exported.
Management team has 60% of Iliad so M&A needs to be value creative.
* Low leverage/Use of cash: Iliad flagged three potential uses of cash to
address an unlevered balance sheet, at 0.8x YE14 net debt to EBITDA.
1.Higher capex: Iliad could decide to accelerate investments if it can deliver
faster FCF growth. In particular, we believe that investing faster in mobile
roll-out to reduce roaming payments to Orange makes sense as it is FCF
accretive in the medium term but improves quality perception.
2. Foreign M&A (see above)
3. Cash returns: In the absence of attractive external growth opportunities
(we understand c 2 years), Iliad could look into returning cash to
shareholders.
* Distribution strategy: Iliad distribution strategy is primarily online-driven.
Iliad use “flash” promotional sale from time to time using the “vente-privee”
website.

>>> Orange
M&A remains a key focus post comments from the press linking Orange to
Telecom Italia. Management has emphasized the importance of Africa as a
region where it was planning to increase its exposure. Investors remain focussed
on domestic M&A but Orange believes the likelihood of a deal in the short term
has reduced.
Thierry Bonhomme, Senior EVP and head Orange Business Services,
represented the company
* M&A: Focus on geographies where are present, ie Africa or Europe. Not
working on Telecom Italia. Africa: the creation of a single holding for all
African assets will allow Orange to be more agile and flexible to participate in
consolidation in Africa which remains very fragmented with over 240
operators. Ora wants to increase exposure to Africa, will open Mobinil to
other investors, want to increase its stake in Meditel. Consolidation in
France: ORA very confident with commercial targets, cost saving targets.
Situation far better than a few years ago. Some stress in competitors but
don't expect consolidation short term.
* Cost cuttings: 1) commitment of Orange delivering 2018 better revenues
and EBITDA better by 2018. 3bn cost savings: all the geography at working
on savings to reduce gross savings. 25000 departures is a major part of the
cost saving as it also implies real estate savings, work equipment etc. expect
operational costs saving with fibre migration. Do not want to commit on
EBITDA if there is other unexpected cost but should be accretive to EBITDA.
* Corporate business in France: dynamics in business. Different segments:
Soho, SMEs, Enterprise, MNCs. Market share in France are v strong and
more or less stable. Very strong organisation and sales coverage. Taking
share requires a strong commitment. In reorganisation of competitors, limited
consideration for enterprise specific needs, Orange seeing many customers
coming over as they value 24/7 service, account management, dedicated
network.
* Spectrum auction: satisfied to see apparent position by regulator not to give
reserve block. Key is reserve price, induces behavior of players during the
auction. ORA considers spectrum is a key asset because of traffic explosion,
doubling every year. 1000x increase expected in the coming ten years to be
covered by 1) 10x from refarming, 2) 10x by next technologies including 5G,
and 3) 10x by increased sites.
* M2M: want to leverage on their asset and IOT and mobile banking are area
where they have taken commitment. Many opportunities to develop skills
from this. Mobile banking: money transfer (Orange money in Africa), cash
(Orange cash with NFC,), banking company (being a broker of banking
services). Very promising as perceived as legitimate provider within this
banking service business.

(BofA-ML) Telco Conf. Feedback : French Names

>>> Iliad
Reiterate Buy, mid-term valuation in in line at 12.4x EV/OpFCF and 5.4% FCFE
despite a superior growth. Iliad’s message remains bullish on a number of fronts:
1) pace of net additions in broadband with solid share of additions in Q1, 2)
traction in mobile with leading share of additions every quarter since launch in
2012, and better customer mix, and 3) progress on mobile network roll-out that
drives better quality but also better economics. Guidance is for >10% EBITDA
growth for the full year 2015, however Iliad expects top line growth coupled with
benefits of the migration of traffic to its own network to have positive benefits on
margins as early as H1. We forecast with 10.4% YoY EBITDA growth in H1. We
expect Iliad's roaming bill to Orange to remain stable YoY (higher coverage with
950 sites in Q1, offset by higher subs base and usage), however we see roaming
costs declining c 100mln in H2, which we expect to translate into 22% EBITDA
growth in H2.
Thomas Reynaud, Deputy CEO and CFO
* Good commercial momentum… Iliad’s management insisted on the current
good commercial momentum driven by service and product innovations (4k
box, roaming etc.). Mobile base mix is improving with higher share of €20
offers vs €2 while mobile market share of net adds have consistently
remained above 65% over the last 13 quarters.
* … to translates into EBITA growth: Mobile contribution expected to turn
positive as of H1 due to sustained top line growth and higher traffic offloaded
to own network. Progress on mobile network roll-out drives better quality but
also better economics. Guidance is for >10% EBITDA growth for the full year
2015, however Iliad expects top line growth coupled with benefits of the
migration of traffic to its own network to have positive benefits on margins as
early as H1.
* M&A “a nice to have but not a must have”: Iliad has currently no plans for
M&A but remains open to opportunities. Iliad is looking at maverick in market
where pricing arbitrage is possible and where Opex and Capex are
undermanaged. Iliad think it has specific and efficient vision on cost
management (online sales, simplicity of offering) which can be exported.
Management team has 60% of Iliad so M&A needs to be value creative.
* Low leverage/Use of cash: Iliad flagged three potential uses of cash to
address an unlevered balance sheet, at 0.8x YE14 net debt to EBITDA.
1.Higher capex: Iliad could decide to accelerate investments if it can deliver
faster FCF growth. In particular, we believe that investing faster in mobile
roll-out to reduce roaming payments to Orange makes sense as it is FCF
accretive in the medium term but improves quality perception.
2. Foreign M&A (see above)
3. Cash returns: In the absence of attractive external growth opportunities
(we understand c 2 years), Iliad could look into returning cash to
shareholders.
* Distribution strategy: Iliad distribution strategy is primarily online-driven.
Iliad use “flash” promotional sale from time to time using the “vente-privee”
website.

>>> Orange
M&A remains a key focus post comments from the press linking Orange to
Telecom Italia. Management has emphasized the importance of Africa as a
region where it was planning to increase its exposure. Investors remain focussed
on domestic M&A but Orange believes the likelihood of a deal in the short term
has reduced.
Thierry Bonhomme, Senior EVP and head Orange Business Services,
represented the company
* M&A: Focus on geographies where are present, ie Africa or Europe. Not
working on Telecom Italia. Africa: the creation of a single holding for all
African assets will allow Orange to be more agile and flexible to participate in
consolidation in Africa which remains very fragmented with over 240
operators. Ora wants to increase exposure to Africa, will open Mobinil to
other investors, want to increase its stake in Meditel. Consolidation in
France: ORA very confident with commercial targets, cost saving targets.
Situation far better than a few years ago. Some stress in competitors but
don't expect consolidation short term.
* Cost cuttings: 1) commitment of Orange delivering 2018 better revenues
and EBITDA better by 2018. 3bn cost savings: all the geography at working
on savings to reduce gross savings. 25000 departures is a major part of the
cost saving as it also implies real estate savings, work equipment etc. expect
operational costs saving with fibre migration. Do not want to commit on
EBITDA if there is other unexpected cost but should be accretive to EBITDA.
* Corporate business in France: dynamics in business. Different segments:
Soho, SMEs, Enterprise, MNCs. Market share in France are v strong and
more or less stable. Very strong organisation and sales coverage. Taking
share requires a strong commitment. In reorganisation of competitors, limited
consideration for enterprise specific needs, Orange seeing many customers
coming over as they value 24/7 service, account management, dedicated
network.
* Spectrum auction: satisfied to see apparent position by regulator not to give
reserve block. Key is reserve price, induces behavior of players during the
auction. ORA considers spectrum is a key asset because of traffic explosion,
doubling every year. 1000x increase expected in the coming ten years to be
covered by 1) 10x from refarming, 2) 10x by next technologies including 5G,
and 3) 10x by increased sites.
* M2M: want to leverage on their asset and IOT and mobile banking are area
where they have taken commitment. Many opportunities to develop skills
from this. Mobile banking: money transfer (Orange money in Africa), cash
(Orange cash with NFC,), banking company (being a broker of banking
services). Very promising as perceived as legitimate provider within this
banking service business.

(BofA-ML) European Telecom : Conference Feedback

* BofAML conference: all about M&A
We hosted over 30 global telco companies and 450 investors at our Global Telecom
and Media conference in London last week. From a thematic standpoint, M&A was
clearly on the forefront, fuelled by ongoing newsflow on AT&T in Brazil, Liberty/VOD
and TMUS/DISH. Beyond stock specific situations, incumbents were pressed about
the rationale for cross border deals. The broad consensus is that those will happen
over time, but that synergies are likely to be limited and political considerations are
still key. The tone on business environment was reasonably constructive. Other
themes included mobile data, cost efficiencies (All-IP, Altice methods) and regulation.

* Focus on in-market/convergence M&A above cross-border
Italy appears to be the next market that is likely to see 4 to 3 mobile consolidation.
Discussions on a 50/50 JV between Wind and Hutch continue to progress. Telecom
Italia is turning into a special situation with Domestic/Brazil/Vivendi talk, while
domestic recovery is ongoing but still exposed to below the line mobile discounting.
Consolidation discussions seem to have cooled down in Brazil and France.
Vodafone / Liberty was a key topic; Vodafone explained that strategically a
combination with Liberty could strengthen both companies and synergies could be
material. VOD has confirmed discussions for an asset swap with Liberty (not a
merger). Orange explained it would continue to increase exposure to Africa and the
Middle East. Incumbents were pressed about the rationale for cross border deals;
consensus seems to be that those deals are likely to happen over time, but not
immediately, while synergies are seen as limited. Nordic operators are downplaying
major M&A near term.

* Stock conclusions – broad-based positive momentum
Overall, the tone was constructive. Sweden remains strong and wireless margins
should improve driven by increasing data consumption/monetisation. Tele2 likely to
have another good quarter in Sweden, hitting their target of mid single digit ASPU
growth. TeliaSonera should show EBITDA improvement QoQ driven by lower
handset subsidies and FTTH connection fees. TDC network investments are
beginning to pay off. Germany also stands out as a sound market. DT was confident
it could retain its quality premium and continues to see good traction from its
convergent product while increasing household ARPU, with VOD willing to play the
quality game and guides to an improvement in post Q2 as back-book impact clears.
Iliad expects the migration of traffic to its own network to bring EBITDA benefits as
early as H1. KPN is seeing positive trends in consumer mobile and expects to see
mobile to get back to growth later in the year. Fixed is also solid with price increases
scheduled for July 2015 post Ziggo’s price increases. We expect a benign Q2 at
Belgacom and could see guidance nudged upwards. TEF could see a weaker Q2
domestic performance post strikes, however synergy opportunities in Brazil look to
be moving higher.

(BofA-ML) Vodafone : Upgrade from Underperform to Neutral : Realising Value

* Valuation supports a more neutral stance
We raise PO to reflect AMAP peer group multiples as a more accurate measure of
value, with VOD reported to be assessing a potential IPO of Indian operations. This
derives a PO of 252p, alongside which a relative valuation in-line with peers justifies
a more Neutral stance, thus we upgrade. Downside risks include a slower than
expected recovery following a disappointing FY print (a driver of our previous
Underweight thesis that has seen consensus expectations fall), and our mid-term
thesis on increased capex needs that could mean consensus expectations of
dividend growth are disappointed. However, balancing this is upside risk potential
from a possible asset swap with Liberty Global - now confirmed in negotiations - that
could realise synergies from a shift to convergent infrastructure.

* Fundamentals still a work-in-progress
FY results confirmed a fragile recovery; with market underperformance in Germany,
and expectations of a slower recovery across the group until H2. Not all was
disappointing; Italy and Africa improved and KPIs were encouraging from the
perspective of data growth and project spring-funded network performance. Midterm,
without M&A, we think capex guidance is unsustainable and that consensus
expectations of dividend growth could be disappointed

* M&A could derive upside
VOD has confirmed it has entered into discussions with Liberty Global about a
possible exchange of assets but not a combination of the two groups. This follows
comments from Liberty Global Chairman John Malone in an interview with
Bloomberg where he described the Western European assets of VOD as a ‘great fit’
with Liberty’s footprint. In a separate note today we explore the possibilities of an
asset swap and wider acquisition/merger scenarios and confirm that we believe
synergies could be material.

(BarCap) Luxury Goods : Pricing shows narrowing differentials

Pricing shows narrowing differentials

Updating our price comparison from March shows that the price gap between Europe and Asia has narrowed back towards normalised levels. Our data (albeit a small sample) shows Hong Kong is now at a 13% premium (historically c15%) and China +37% (historically 30-40%). This appears to have been completed efficiently through some price adjustments for some brands and helped by FX although it is too early to examine the impact on volumes and the redirection of the demand. While this is selective data it shows that the hard luxury companies have fully moderated prices while soft luxury companies have some way to go. While we wait for the volume impact, we remain more positive on the hard luxury companies, with Richemont the preferred name in the sector. In soft luxury LVMH is our preferred choice given it remains the price leader and has handled its LV rejuvenation exceptionally well. With H1 margins the other main issue due to continued softness in organic growth and FX hedging, we remain relatively cautious on the sector. Following the departure of the coverage analyst, with this report we transfer primary coverage of Richemont, Kering, Swatch, Tod’s and Mulberry to Julian Easthope.

Soft luxury companies still some way to go: Our analysis shows that the industry has narrowed the pricing gap in Hong Kong from 30% to 19% and China from 59% to 44% between March and June with the US at a 19% premium. We believe most companies are waiting for price leader Louis Vuitton to make adjustments before following suit Although there are margin implications of doing this before the FX hedges ease in Q4.

Hard Luxury companies have adjusted: By contrast, the hard luxury companies now average a 10% price discount in Hong Kong, 13% premium in China, with the US at a 5% discount. Even taking VAT refunds into account, there is still relatively limited opportunity for parallel imports.

Sector expensive in nominal terms but reasonable relative to the market: looking at the pure luxury companies, the weighted average PE of 18.7x is at the top end of the 13x-19x PE range although this amounts to just a 25% market premium – towards the bottom of the 5% to 53% range. We believe that H1 will be a tough period on margin with the full impact of FX hedging likely to be felt in this period but these pressures should ease in H2 and become a tailwind in 2016.

Richemont the preferred investment: With hard luxury pricing having been addressed and with the margin implications highlighted by the company at the FY 15 results, Richemont is our favored stock. It benefits from its strong position in jewellery, which is performing well, significant cash pile together with Yoox/Net-A-Porter JV that we believe is worth 4 points on the multiple on 18.7x (c14.7x ex cash and NAP).

LVMH – also good value: In the soft luxury area, we prefer LVMH given its price leadership that stands on 18.1x – in line with the sector.