OW: Scarcity value, we include M&A premium in valuation
* Vodafone buying ONO may trigger further consolidation in Spain
* Jazztel’s fibre strategy has increased its scarcity value. A combination with Orange could unlock significant synergies
* We reiterate our OW rating and increase our target price to EUR12.9 (from EUR9.2) as we incorporate an M&A premium
Jazztel’s scarcity value: Jazztel is one of the few alternative operators in Europe to have
pursued a fibre strategy, gaining what we could define as a quasi-cable status. As importantly,
Jazztel was able to gain a first-mover advantage by signing on 8 October 2012 a coinvestment
non-exclusive agreement with the incumbent Telefónica (TEF.MC, EUR11.11,
N) for the shared deployment of a fibre-to-the home (FTTH) network aimed at covering 3m
homes. Vodafone’s (VOD.L, 223p, OW) announced acquisition of ONO (17 March) makes
strategic sense as it helps Vodafone to add, at a stroke, about 7.2m homes upgraded to a
DOCSIS3.0 platform. It is now Orange that is in the weaker position; a potential Jazztel-
Orange combination (see Reuters, 25 March) could be a strong strategic response, and could
allow Orange Spain to significantly accelerate its fibre deployment and acquire Jazztel’s
significant know-how.
Jazztel-Orange Spain merger scenario could unlock significant synergies: According to
our base case scenario (two-thirds fibre footprint overlap, 5% long-term fixed yearly opex
savings), a Jazztel-Orange Spain combination is likely to generate capex and opex synergies of
~EUR2.1bn (NPV). This includes capex savings of around EUR289m and cost savings of
around EUR1,836m, which include incremental ULL and opex savings.
Strong execution continues at Jazztel: Jazztel managed to achieve/exceed its 2013 guidance.
In Q4 2013, all significant KPIs (+34k broadband subscribers and +172k in mobile) were
ahead of our expectations. Mobile growth was mainly driven by a convergence push, leading
to lower churn and higher margin. Moreover, the company reported cheaper fibre deployment
costs than expected.
Valuation: We reiterate our Overweight rating on Jazztel and increase our one-year forward,
DCF-based target price to EUR12.9 (from EUR9.2 previously). The key reasons for our higher
target price are: (a) we incorporate an M&A premium of 10% in our valuation given that the
Vodafone-ONO deal increases the appeal of Jazztel as a takeover target; (b) higher EBITDA
forecasts driven by good traction of its convergence product; (c) lower capex estimates driven
by FTTH cost savings; and (d) lowering the beta to 1.1 from 1.4 (in line with the rest of the
European sector), partly offset by a higher risk-free rate of 3.5% (from 3.0% previously).