* A long-term necessity with limited short-term probability – No changes to ratings or TPs
As we argued in If two's company, and three's a crowd, is four a party?, only two operators can
nationally invest in fibre infrastructure: Orange and SFR. For Bouygues, and to a lesser degree
Iliad, the inevitable consumer shift to high-speed-high-value converged services will likely leave
both operators at risk of ‘value’ share erosion. This forms the basis of our view that French
telecoms must eventually consolidate from four players to three.
* Anticipating the next deal – same players but a different structure
Recent press reports suggested that operators had revived ‘discussions’, although the claims were
then robustly denied. Since the last consolidation attempt, we note that: 1) Orange is unlikely to
lead the operations; 2) Telecoms remains core to Bouygues; 3) US is increasingly a focus for
Altice; and 4) Iliad would still welcome consolidation. In this context, we see a 50/50 ‘BouyguesTel-
SFR’ merger as the most credible scenario. In this report, we show that such a deal could be both
approved and funded, provided that the operators can agree on a price and remedies.
Financials: synergies and pro-forma numbers
Despite the heavy cost cuts at Bouygues Tel & SFR, a merger would still secure big savings (ULL
& wholesale fees, network, fibre capex, etc.). We think a merger could achieve ~EUR5bn NPV of
net synergies and fetch a further EUR2-4bn in asset sales. Finally, we believe Bouygues would be
keen to increase its stake to 50%, either immediately (Altice bringing more debt to the NewCo) or
progressively (via call options) – an opportunity for Altice to de-lever and fund other US deals.
On the road with Iliad – All about 2 to 20
Earlier this month, we roadshowed with Iliad’s CEO and Deputy CEO. Iliad does not believe four
operators can attain sufficient scale to invest in fibre and thinks that the market would ultimately
consolidate – a view that we share. Meanwhile, Iliad remains focused on executing its strategy
(expanding mobile margin through network investments) while planning its Italian entry with
confidence (see our Iliad roadshow feedback).