Special Situation: Bouygues price reflects the chances of a sale of Bouygues Telecom - Short EN: FP / Long NUM: FP, ORA: FP and ILD: FP
On January 5, Bouygues confirmed earlier press comments that it was in early-stage talks with Orange for a potential combination of the two companies. We believe Orange-Bouygues deal can go through although there are still a lot of obstacles to meet including regulatory risks combined with uncertainties regarding the ability of Orange to make asset disposals on good terms to a third party player.
In this report we do not attempt to take a view on the likelihood of such deal but we rather argue that a merger between Bouygues and Orange is already priced in Bouygues share price. In other words, if consolidation occurs, we see little upside whereas the downside risk in a no-consolidation scenario would be considerable based on the current share price. We base our thesis on a SOTP analysis for Bouygues in which we take the Telecom Business at the maximum estimated deal price (€10bn, 13.5x EV/EBITDA 2015). This analysis shows that in a best case scenario the discount to NAV is 24%. The question is of course what discount would be adequate for Bouygues post the telco disposal. While there is no “correct “answer, we believe that given the portion of the unlisted assets in addition to the expected structure of the deal in which Bouygues will have a minority stake in orange, the appropriate discount should be at least 15-20% (in a strong market). Another variable is what use will Bouygues make of the cash from the sale. In any event, to our view, the current level doesn’t not leave room for meaningful upside.
Full report attached.