Adjusting valuation post ORAN & BOUY ending consolidation talks
Bouygues cited two key reasons for ending talks: deal execution risk and
governance concerns over its stake in Orange that would have come as
part payment. But given the €10-20 bn net value accretion for the French
market that we estimated could come from consolidation (see our note End
of M&A talks negative for market, April 4, 2016) we continue to see
ongoing material incentives for this deal. Given the end of talks, we lower
the expected probability of French consolidation reflected in our target
valuations to 20% (from 60%), which lowers our 12-month price targets.
Encouraging signs on pricing for market growth prospects
With concerns of near-term price aggression post the deal failure, we see
two recent inflationary price moves as supportive: Bouygues raised its
premium broadband price by c.20% and NUM raised prices up to 10%
across its fixed and mobile base, albeit with more content now included.
Long term, we expect market growth boosted by inflationary pricing given:
(1) France has the second-lowest pricing in Europe; (2) Bouygues is
structurally challenged as a scale mobile player struggling to build scale in
fixed – its 2015 CMD strategy is dependent on inflationary pricing; and (3)
both players will need material ARPU expansion as neither make any cash
from current operations.
Orange CL Buy - compellingly priced organic growth, 48% upside
Group sales have now grown for the second consecutive quarter following
six years of decline. French top-line trends are improving and will inflect to
growth during 2016, on our estimates, with price rises offering upside risk.
With ongoing cost-cutting, we model 2016-20E group sales/EBITDA CAGRs
of +1.5%/+4.1%. Orange trades on a 10% 2017E FCF yield, a 25% discount
to the sector despite a modestly superior growth outlook. With French
consolidation less likely our ROIC-based 12-month price target falls to
€21.5 (from €22.2), which includes an M&A component.
Other PT changes: Altice, NUM, ILD remain Buy; BOUY Neutral
We adjust our 12-month price targets for the other French operators,
reflecting the lower probability of consolidation (from 60% to 20%).