TheChek News Flow

We argue that the French market structure of four fixed and mobile

network owner competitors is the least attractive in Europe as laid out in

our note “Iliad’s gain is others’ loss” published in 2011. December brought

three updates highlighting incremental competition in mobile and fixed

that reinforced our view that the market is set to continue to decline for the

next five years. We lower our French forecasts for all players as a result.

We raise our probability of French consolidation (from 4 to 3 players) to

50% from 25%. As competitive pressure is not abating, we believe operator

desire to consolidate is growing and that the French authorities are more

open to consolidation. We assume market repair would benefit all players,

as it would raise them from fourth quartile to average in our structural

framework, implying a rise in the long-term growth outlook from -1%

CAGR to flat. For the consolidators, we identify €4-7 bn of cost synergies.

We now reflect these benefits, probability-weighted, in our valuations.

We forecast French/group EBITDA CAGR of -8%/-4% (2013-15) vs. company

targets of stability. French consolidation would raise Orange from fourth

worst to average in our structural quality framework implying a stable

growth outlook. A greater probability of French consolidation offsets our

2%/1% lower 2014/15 EBITDA forecasts, raising our price target, reducing

downside. We remove Orange from the Conviction List but argue the share

price over-estimates consolidation benefits and reiterate our Sell rating.

Iliad: Up to Buy and onto CL; 12m target price to €238 from €201

The shares have underperformed by 30% over the last six months and in

our view Iliad is now the cheapest growth stock in the sector. We expect

ongoing share take in fixed and mobile supported by Iliad’s clear cost

advantage. By 2017 we forecast Iliad revenues to be growing at 6% (vs.

sector ex-growth). But Iliad trades on 12x 2017E EV/NOPAT, in-line with the

sector. We also argue Iliad could be a material beneficiary of consolidation.

Like Iliad, we believe Bouygues could be a key beneficiary of consolidation.