We believe consolidation is still on the cards in France. Iliad’s continuing commercial drive and the approaching spectrum auction are putting pressure on Numericable-SFR and Bouygues to do a deal. It is never easy to change ratings ahead of a deal – but our conviction is that the risk that Numericable-SFR overpays for Bouygues Telecom, even though rarely discussed, is real.
Consolidation would bring its share of good news – but also bad surprises
We still believe a Numericable-SFR-Bouygues Telecom combination could create c.EUR9bn value, including cost synergies, market repair in fixed-line and asset disposals. However, looking at the post-deal market structure, we see a growing risk that the regulators impose conditions ensuring that Iliad remains a strong maverick; and in the resulting three-player market, Iliad is likely to target a significantly higher market share. The consequences? Mobile market repair would be very unlikely and the merged entity would lose share in the long term.
Numericable-SFR – Avoid the acquirer’s risk. Downgrading to (-) from (=), TP EUR45 vs. 48
We continue to assume that Numericable-SFR pays EUR8bn for Bouygues Telecom, but our revised market scenario points to lower value creation potential for the group: EUR4/share versus EUR10/share previously, leading to our new target price of EUR45/share. We think that the risk of mobile revenue loss is overlooked by the market – hence our downgrade to Underperform.
Bouygues – Travel and arrive? Downgrading to (=) from (+), TP EUR39 vs. EUR38
The market has been expecting a Telecom sale for a while, hence the limited upside. A reason for not jumping ship has been the anticipation of a jumbo cash return – but as we expect Bouygues to be paid half in shares, the cash return may have to wait. In the meantime, the stock’s valuation ex- Telecom is not particularly compelling vs. future peers Vinci and Eiffage. We downgrade to (=).
Iliad (+) is our top-pick amongst French telcos, TP EUR260
Iliad remains an attractive growth story and is best placed to benefit indirectly from consolidation.