Euro Telecom event driven situations
Re-iterating BUY on Vodofone post ONO deal; BUY Jazztel
VOD LN: 220.30p; target: 290p: JAZ SM: Eur 11.04; target: Eur 13.50
March 31, 2014
On March 17, VOD announced the acquisition of Ono for €7.2bn on a debt free and cash free basis. VOD expects the transaction to complete in calendar 3Q 2014.
The deal substantially increases VOD’s hold on the Spanish market. Through this acquisition, VOD will add a cable line network that covers 13 of Spain’s 17 regions. The deal provides significant cross-selling opportunities for VOD as (i) Ono has around 32% of fixed base customers and VOD has ~17% of mobile base customers (ii) the geographical overlap between VOD and Ono customer base is high. We do not expect regulatory issues to the deal as Ono and VOD compete in different product segments.
In terms of deal pricing, a relative value chart based on precedent multiples suggests that VOD is paying a fair price for Ono. Pre-synergies we estimate that VOD is paying 10.6x EV/EBITDA and 4.5x EV/Sales. Post-deal, we estimate that VOD’s EBITDA margin will increase from ~29.1% to ~29.6%. On our relative screen (EV/Sales vs EBITDA) VOD & Ono combined, looks undervalued vs peers. On this basis, we would value combined VOD & Ono at around 290p a share.
The valuation implications for Jazztel would suggest a price tag in excess of Eur 13/sh. Jazztel is a listed cable operator in the Spanish market and Orange has been rumoured to be a potential bidder. Certainly, the whole European telco/cable is in flux and Jazztel is unlikely to remain independent. Currently, Jazztel’s EBITDA margin is below 20%, but Jazztel projects margins of ~26% by 2017 driven by the rollout of a fibre network developed jointly with Telefonica. Currently Jazztel is fairly-valued. However, Jazztel could be valued around €13.5 if we assume a 26% EBITDA margin.
FULL REPORT ATTACHED