When the dust settles – back to four operator market
We reassess our call on French Telecoms after the failed attempt by Altice to acquire Bouygues Telecom. Consolidation could happen but visibility is low, and in the meantime if pricing is stable, it is unlikely to improve markedly in our view. We therefore remove strategic value upside from consolidation from our valuations on Iliad and Bouygues. We lower POs on Iliad and Orange but reiterate our Buy ratings, while we downgrade Bouygues to Neutral based on DCF value for its telecom asset. NUM remains Neutral with an unchanged €55 PO.
Stable pricing, but limited room for pricing power
1/ We continue to see significant rationale for consolidation, but for now the rejection of Altice’s offer by Bouygues leaves the market structure unchanged around two dominant converged operators Orange and Numericable-SFR, a fast growing Iliad but still in build-up mode, and a sub-scale Bouygues Telecom.
2/ Pricing has been stable for two years and is unlikely to come under pressure, but we do not see significant pricing power at this juncture. Bouygues Tel new targets do embed some price increases, but only after a first phase of
subscribers’ growth (+1mln subs in mobile and fixed by 2017).
3/ the spectrum auction could see bidding tension with 4 bidders for six 5MHz blocks, we assume €500mln per block.
Stock implications: lower POs, downgrade Bouygues to Neutral, Buy Iliad and Orange
• Iliad remains our top pick within French telcos, but we revise our PO down from €284 based on a target multiple (reflecting consolidation potential) to our DCF based fair value of €263, reflecting a status quo on market structures, and €1bn spectrum cost vs €800mln before. We still see a strong Buy case for Iliad, with a valuation now down to sector multiples on 2016E forecasts (7.0x EBITDA, 14.3x EV/OPFCF) despite higher growth potential.
• Orange: We maintain our Buy on Orange but reduce our PO from €20 to €18. We continue to see substantial value in Orange, with the stock trading on 10.8x 2015E EV/OpFCF and 7.0% FCFE yield, while we expect Q2 to show improving
EBITDA trends, supporting FY expectations. However, for now France is on the sidelines of broader in-market consolidation trend in most European’s markets. Our PO reduction reflects lower long term wholesale business as FTTH picks up.
• Bouygues: we downgrade the stock to Neutral and reduce our PO from €41 to €33.7, implying 12% total return potential. This reflects a move to a DCF valuation on Bouygues Telecoms of €6.3bn (implied 9.0x EBITDA multiple on our 2015E
forecast), versus a €9bn valuation previously, with a lower strategic value attached to the asset.
• Numericable-SFR: we maintain our Neutral rating and €55 PO. We see two midterm options for NUM-SFR: 1/minority buy-back of share swap with Altice to remove potential minority leakage, or 2/ Use NUM-SFR as a vehicle of further
European expansion.