* Q4 better than consensus; Bouygues-Iliad deal makes consolidation likely
Our target price embodies a 90% probability for mobile consolidation because
of the speed at which Iliad and Bouygues reached an agreement aimed at
facilitating consolidation means that the companies are likely to agree on a
merger between themselves if Vivendi accepts Numericable’s offer for SFR
instead of Bouygues, which Iliad actually sees as unlikely. Therefore, mobile
consolidation is likely to happen in both scenarios and Iliad would benefit.
Hence, we maintain our Buy rating.
* Bouygues offers to buy SFR and prepares remedies: sell spectrum/sites to Iliad
Bouygues (B) entered exclusive negotiations for the sale to Free of 15,000
mobile sites and spectrum (2G/3G/4G) for up to €1.8bn. Iliad was planning to
spend c.E900m to roll out 9,000 sites by 2018 so it would get the best network
in France at a lower price than roll out. Iliad seems very confident that the SFRB
combination will go ahead. The regulator and the social parties are backing
it. In addition, the Antitrust should be convinced by the spectrum/network
deal. Regulatory-wise, it should take the same time (c.9 months) to examine
SFR+NUME and SFR+B because a combination with Numericable implies
combining three wire line operators (B and SFR already share fixed networks),
so it is potentially more complicated to pass than the mobile tie up. Industry
sources suggest synergies would be higher in a SFR+B combination because
of a 100% overlap at all levels, with NUME overlapping only in 35% of the
territory and only in fixed. SFR is due to decide in the next one to three weeks.
* Estimates upgraded simply to incorporate Q4 results
Sales +0.6%; EBITDA +3.2% in 2014 and +1.5% in the following years. OpFCF
was 17% better than expected in 2013; 2014 is +7%, following years +2-3%.
* Valuation; increasing TP 16% to E222 on preliminary consolidation scenario
Our target price is DCF based. We use 8% WACC and +1% g (see page 6). Iliad
trades at a 7% discount to alternative carriers based on 2015 EV/EBITDA and
at a 31% premium on an unlevered FCF yield. We attribute a 90% probability
to mobile consolidation that would imply: 1) better ARPU (we assume +E0.5 in
year one and +E 1 in year two, 2) higher market share (25% by 2022 vs. 17% in
our base case, 3) 38% mobile mg by 2022 (vs. 37%), 4) unitary SACS 20%
lower and fixed margin trending to 50% (vs. <48%). We see the resulting 19%
EBITDA increase (E400m) as on the shy end of consolidation scenario
sensitivity. Downside risks: 1) failure to expand FTTH penetration limiting
margin expansion and 2) quality issues on 4G in the absence of a deal with B.