Rising M&A optionality boosts Altice (CL Buy), Numericable (Buy)
* French consolidation increasingly likely in 2015
We continue to see a 60% probability of industry consolidation in France given ongoing competitive and convergence pressures. We note that Altice’s CEO stated recently that “we see ourselves as a natural buyer (in France)” (Reuters, November 20, 2014), and we believe the completion of Numericable’s merger with SFR provides Altice with the opportunity to participate in further industry consolidation in 2015.
* Updating our M&A analysis to reflect new ownership of SFR
We believe a number of M&A outcomes are possible in France, and we do not take a view on the likelihood of any particular transaction. We update our analysis of the potential synergies available from various combinations to reflect SFR’s new ownership: given Altice’s strong track record for turnarounds, we estimate that if it takes a lead in consolidation it can achieve a €2-5 bn NPV of further cost-cutting savings above our previous estimate, raising the NPV of potential synergies achievable to €9-16 bn.
* Numericable (Buy): Raise PT to €50 given potential consolidation
Our scenario analysis suggests that taking an active role in French consolidation could be 31%-87% accretive to Numericable’s 2018E FCF, albeit with increased balance-sheet risk. Alternatively, we believe Numericable could improve revenue growth (vs. our base-case forecast of a -2% 2014-18 CAGR) as a passive beneficiary from consolidation.
* Altice (CL Buy): M&A optionality rising, raise PT to €87
In addition to the potential upside we see to Numericable’s FCF, highly accretive M&A in France could further accelerate Altice’s wider M&A ambitions, which are underpinned by its strong cost-cutting track record. In our ‘blue sky’ scenario, we estimate Altice’s M&A capacity could increase from c.€10-20 bn to €20-30 bn, with FCF exceeding €3 bn by 2021. While there is a wide range of potential outcomes from pursuing such a strategy, we increase our target multiple for Altice to better reflect this optionality.
* Orange (CL Buy) and Iliad (Buy) remain key beneficiaries
Our CL Buy-thesis on Orange is predicated on self-help via cost cutting and the current stabilizing French market. Consolidation could bring lower churn and/or better growth, despite the likely loss of wholesale revenues.