Consolidation off. April fool? ILD and ORA to Hold; buy NUME on weakness
* Iliad TP cut 19%, Orange -7%, Numericable -6%
We saw Iliad as a play on consolidation while ORA and NUME had upside even if it failed. Our TPs were embodying 70-75% probability of consolidation following the recent bullish comments of the players involved. Scrapping
consolidation benefits from our TPs leaves 5% downside potential for Iliad, which we cut to Hold from Buy, 8% upside for Orange, which we cut to Hold and 29% upside for NUME, a buy on weakness as Q1 is unlikely to be a good
quarter due to high promotional activity from all players. Ytd outperformance vs. sector was +9/+7/+16% for ILD/ORA/NUME.
* Why was consolidation off on April 1? Can talks be resumed? 5% prob. in TP
Orange had set clear conditions that were not met. Bouygues sees four reasons for the failure, of which execution risk and governance (no double vote accorded and no possibility of increasing the stake in ORA for some years, according to Les Echos) are the key ones, while a compromise could have been reached on valuation and employee protection. We highlighted in our January report that paramount to the Regulators’ greenlight was balanced resulting market shares for the three remaining players. With Iliad not taking mobile subs in the deal, we can see why Bouygues saw the execution risk as too high. We wonder if Iliad really wanted consolidation or just to disrupt Bouygues even further. Although Orange and Bouygues declared talks are off for the LT, we kept a 5% probability in our SOP because we still cannot believe that a deal that created value for all the parties involved is not happening after all of the hours of work spent on it.
* Estimate revision: strong promos in Q1 and more fighting for clients ahead
We trimmed NUME sales -0.6%/-1.5%/-2.1% in 2016/17/18, respectively, and EBITDA -0.9%/-1.9%/-2.5% as we believe it may be tougher to achieve the targeted turnaround with the aggressiveness that may stem from the failed deal. 2015-18 EBITDA CAGR is still 8%.
* E212 TP for ILD, E16.7 for ORA, E47 for NUME; 5% prob. of consolidation
We remind readers that TPs would be E278/18.9/47 with consolidation (for NUME, based on recent commentary, we conservatively assumed that the small dilution from a potential capital increase would have offset most of the market repair benefits). We use DCF-based SOTP to derive our target prices, with WACCs ranging from 7% to 13.1% (Orange’s African assets) and g from 0% to 5%. See details in the note. Upside risks: consolidation talks resumed. Downside: 1) M&A destroying value, 2) Orange/Iliad potential buyers in cross-border mergers.