* No room for the incumbent to acquire. In our opinion, it is
highly unlikely that Orange could participate in any consolidation
deal due to its dominant position (41% market share in fixed;
35% in mobile). On the other hand, we think that Orange cannot
afford to spend €6bn in cash to acquire Bouygues as this would
put its debt rating under enormous pressure, so any move, which
we deem unlikely, should be financed mainly with shares. In our
view, Orange’s comments last Thursday intend to promote
consolidation more than show a real interest in Bouygues.
* Vivendi should not support any deal affecting SFR. We do
not see SFR/Numericable participating in any additional moves
before closing their own deal, which is expected to happen in
early 2015E, as this would delay Vivendi’s possibilities of cashing
in on its disinvestment in SFR.
* Iliad/Bouygues the only realistic possibility. Following the
previous two comments, we only see a deal between Iliad and
Bouygues as a realistic possibility, but the price should be low
enough for Iliad to be able to extract value from the agreement,
considering Iliad’s slim cost structure as a competitive advantage
which could be cut by merging with Bouygues. We think that Iliad
is not in a hurry to acquire Bouygues and would try to mature the
deal to reduce the price.
* Regulation continues being an uncertainty. French antitrust
and telecoms regulators have not said a word on being more
open to further consolidation in the market, and both regulatory
bodies are not directly controlled by the government. As in other
countries, the conditions to be established by the EU on the
pending deal between Telefonica and KPN in Germany on June 25
should be key to defining the scenario for consolidation in other
countries.
* Investment Action. Pressure on further consolidation in the
French Telecoms market continues to increase. However, we do
not see this happening in the short term as currently we think
Iliad acquiring Bouygues is the only real possibility and that in
this case, Iliad would try to reduce the price. Consolidation should
be positive for the whole sector but we would be cautious on
strong short term stock reactions, especially following Orange’s
recent good performance.