* 17% underperformance since our downgrade five weeks ago
* Telco consolidation possible, but not imminent
* French construction to remain tough
* Upgrade from Reduce to Hold
We downgraded Bouygues to Reduce five weeks ago as the share price
reflected the maximum value that could be reasonably obtained for
Bouygues Telecom (EUR6bn) and a deal valuing Alstom at EUR32 per
share. The risk/reward appeared very unfavourable then as it did not take
into account other less exciting scenarios (no imminent deal in telecom,
the final deal was less attractive than expected for Alstom). After a 17%
share price decline, the risk/reward profile has become more attractive.
* Telco consolidation possible, but not imminent
We still believe that the most likely outcome for the French telecom
sector is consolidation and Bouygues appears to be the weakest player.
That being said, given the unsuccessful negotiations between Bouygues,
Iliad and Orange in H1, we believe that there is low probability of a deal
being signed in the coming months. The players have very different views
on the the sector: Bouygues foresees immediate market repair and is
requesting a very demanding EUR8bn (according to press reports), while
Iliad and Orange do not believe in this thesis (plus, Iliad just needs the
network and some frequencies, which are worth <EUR3bn in our view).
We believe that the companies are heading into a new price war in
broadband (new fibre offer at EUR26 per month vs. EUR38 market price
launched by Bouygues at the end of June). It remains to be seen whether
they will change their positions in the negotiations at the end of the year.
* French construction to remain tough
Construction will amount to 85% of FCF if Telecom is sold and France 60%
of it. And the prospects remain very tough, especially in civil works. FNTP
was expecting a 3-6% decline in CAGR 2014-17, particularly in road
building, where the French syndicate mentions a 20% drop in the order
intake since the municipal elections.
* Upgrade to Hold
After a 17% share price decline, the risk/reward profile has become more
attractive. We upgrade our rating from Reduce to Hold and maintain our
TP of EUR31, which we consider to be a good pivotal price in this
uncertain environment (telecom price war vs. disposal).