Key Takeaway
As the Government and ILD (NC) both side with BYG against NUM, we show
how NUM has some limited scope to sweeten its offer for SFR. Failure to do
so risks a bleak outlook but adding more cash rapidly erodes value upside for
NUM holders. With BYG in pole position and consolidation more probable we
argue ORA offers clearest upside potential. Sensitivity analysis suggests feasible
upside at both VIV and BYG much less now (c.10%).
* BYG-ILD agreement "addresses competitive issues". Exclusive negotiations for the
sale to Free of BYG's mobile n/w and a package of spectrum could raise "up to €1.8bn",
conditional on SFR-BYG Tel completing. ILD said this morning it is "backing BYG". BYG enters
discussions with the Competition Authority in a much stronger position, able to argue that
its offer would preserve strong infrastructure-based investment.
* Government taking sides. Last week, mobile market concentration was a potentially fatal
flaw in BYG's offer for SFR. In our 5th March report we argued there could be a public interest
in not allowing a stranded BYG Tel to wither away. It was unclear whether BYG could count
on political backing to sidestep/solve competition issues. Now it seems it can with Industry
Minister Arnaud Montebourg asserting over the weekend that "competition by destruction
will not stop unless we return to three mobile operators".
* NUM must sweeten its SFR offer to remain competitive. Last week NUM described
its offer as final and said it expires at the end of this week. But with a standalone NUM ex-
SFR facing a challenging outlook, those tactics need to shift. NUM’s best chance is to make
its offer so much more amenable to VIV than the (still complicated) BYG alternative that it
is difficult for the authorities to stand in the way of the seller’s preference. To outflank BYG,
we argue NUM would need to raise the cash component of its offer from €11bn to c.€13bn,
while still offering VIV a 32% equity stake in the merged SFR-NUM. But room for manoeuvre
is tight. €13bn cash still with a €3bn NUM rights issue takes value upside for NUM s/holders
down from c.60% to 20% while post-merger leverage climbs from 3.4x to 4.4x. Increase
right issue to €4.5bn to keep leverage as before, and value upside falls close to zero.
* SFR-BYG Tel merger maths/sensitivities. BYG values SFR at a headline €19bn with
€15/ upside for BYG s/holders. With 45% of consideration in equity, the actual amount
VIV crystallises could vary materially. We illustrate sensitivity to key variables (IPO size,
divestments, remedies). With €4bn remedies, VIV consideration drops to €17.2bn (still with
the merged entity trading on a sector-average 6.0x 2014 EV/EBITDA). On the same scenario,
upside for BYG holders drops back to a (still attractive) €8 per share.
* Winners and losers. ORA can look forward to 4-to-3 in mobile and 5-to-4 in fixed. ILD has
said this morning that 2014 roaming income should not be affected by its prospective BYG
deal. Pricing outlook favourable with SFR-BYG Tel will be 2.5x geared and under pressure
to pay a dividend. ILD will be under Government scrutiny to invest. At our €12 PT, ORA
trades on 5.1x 2014 EV/EBITDA (based bottom-of-range €12.1bn EBITDA forecast). Every
0.2x increase, equates to an extra €1 FV. VIV offers modest upside albeit with some risk
around how cash proceeds get reinvested. Even assuming €17bn effective take-out value
for SFR, rump assets trade close to 6.5x 2015e EV/EBITDA. At 8.5x, VIV FV climbs to €24.
BYG faced the prospect of a chronically challenged Telecom assets without SFR. With SFR -
and even if remedies reach €4bn - our analysis suggests €8/share upside. Currently shares
trade c.€4 above 5 March close (before BYG announced its bid). NUM's growth outlook look
challenged as a standalone entity. It faces loss of c.0.4m BYG white label subs in due course.
ILD will likely experience smoother mobile deployment with site and spectrum bottlenecks
removed. Conflict with Government also potentially resolved.