New major twist in French consolidation - Bouygues taking the lead The probability of a Bouygues/SFR transaction has gone up significantly over the weekend. On Friday, we were still arguing that our 6-month old scenario of Vivendi selling SFR to Numericable was most likely. However, the weekend brought two major twists, impacting our view:
o 1/ The French Government has publicly and firmly taken position, raising pressure on the antitrust body. French Minister Arnaud Montebourg made clear on Sunday (interview in Le Parisien) that he supports a stabilisation of the competitive intensity by moving back to three mobile players – i.e. a support for Bouygues' proposition to merge with SFR.
o 2/ The announced network deal between Bouygues and Iliad reassures the antitrust authority that the market can stay competitive – Iliad will be able to compete on a level playing field. Bouygues and Iliad have announced that they are in negotiations for the sale to Free Mobile of Bouygues' mobile infrastructure for €1.8bn, as long as the competition authorities validate the merger of SFR and Bouygues Telecom. Mr Lassere (Head of Competition Authority) is in a much better position to accept a Bouygues-SFR merger, should Vivendi want it. Bouygues’ offer is taking the lead in our opinion since: 1/ Bouygues’ proposition offers more value to Vivendi than Numericable does, thanks to higher synergies (RJEEe: NPV of synergies of €10bn vs €5-6bn), 2/ it is supported by the French Government, 3/ With Iliad potentially holding a state-of-the-art network, this is a guarantee for the regulator that the market will stay competitive; and 4/ regulation has achieved its goal, with significant market re-pricing in the past two years. If this scenario goes through: Vivendi is the winner; Bouygues, Iliad and Orange are secondary gainers.
o Vivendi: SFR is valued at up to €19bn including 46% of synergies (€10bn) – this is well above our €15bn valuation, or a gap of €3.8/share. In addition, Vivendi would become a positive net cash company with the €10bn proceeds and still hold a 46% stake of the newco.
o Bouygues: a great game-shifting move; however, Bouygues’ share of synergies are somewhat offset by the multiple paid for SFR. Bouygues will hold a 49% stake in a company worth up to €25bn assuming a 5.8x EBITDA multiple and 100% of opex synergies (€19bn without), for a cost of €10bn.
o Iliad: a transaction cost of €31/share to own a full network, partially offset by better long-term margins. We calculate a 2.5x net debt/EBITDA ratio post-transaction, which limits the need for a rights issue.
o Orange: the negative impact of losing €700m EBITDA from Iliad in 2016 (end of roaming agreement) was already expected. Better market dynamics could help a mobile re-rating through revenue and margins. What could go wrong now? 1/ Numericable offers more cash and above-average multiples for Bouygues Telecom; while Numericable can beat Bouygues on cash, we doubt that it could match the gap in potential synergies. 2/ Vivendi accepts Bouygues’ proposition but the antitrust authority goes against; still possible since the new entity would hold more than 45% market share.