French Spectrum auction almost over – benign outcome
* Iliad armed with solid spectrum, benign outcome overall
For once, the result of the French 700MHz auction was more benign than expected, with
the price per block coming below our expectations, and more importantly no “nuclear”
scenario that would have been an Iliad without spectrum. Although a disciplined auction
made sense with both NUM-SFR and Bouygues downplaying the need for 700MHz
spectrum, the outcome was always uncertain. We don’t see direct short-term
implications for potential consolidation, with all players well equipped with low-band
spectrum. However, the “no-talk” period on spectrum ends, and both NUM-SFR and
Orange continue to see rationale for consolidation talks to re-open.
* ARCEP confirms end of French 700MHz auctions
• Auction over after two days and 10 rounds. Total cost: €2.8bn (12% above reserve
price of €2.5bn).
• Orange and Iliad granted with 2 blocks for €932m each, SFR and Bouygues got 1
block for €466m each.
• Secondary auction to determine block allocation by Nov 19th, limited cash outlays
expected
• Coverage obligations (France metro): 98% pop 17 Jan 2017, 99.6% T+15 years.
Coverage obligations in each “department”: 90% pop by 17 Jan 2027, 95% T+15
years. Coverage obligations in less dense areas: 50% 17 Jan 2011, 92% 2027,
97.7% T+15 years
• Payment terms: 4 yearly payments (25% each of total amount), first payment at
attribution of spectrum, and 12 month intervals. 1% of revenues, 20 year period
* Stock implications
• Orange (Buy): starting to build a differentiated spectrum portfolio versus SFR and
Bouygues Tel, with more spectrum in both 700MHz and 2.6GHz. We remain
constructive on Buy-rated Orange on revenue recovery, efficiency and valuation
support
• Iliad (Buy): the auction outcome is a clear positive for Buy-rated Iliad, avoiding a
potential squeeze by competitors. Q3 were solid and pave the way for further
revenue and EBITDA delivery, but higher capex drain mid-term FCF generation
• Bouygues (Neutral): spectrum position remains very solid post auction, with the
same holding as NUM-SFR despite a much smaller subs base, and a total of 25% of
spectrum holding in the market vs a 14% market share.
• NUM (Neutral): we were not expecting an aggressive bidding from NUM-SFR post
the increase in leverage to fund the Vivendi stake payment. NUM-SFR will have to
continue to invest to match the quality gap with leaders, and appears open to
relaunch consolidation discussions in the medium term. We see long term value on
delivery, but revenue improvement required.