* Update Bouygues has confirmed it is in talks with Orange to sell Bouygues Telecom.
* SG view A transaction valuing Bouygues Telecom at €10.0bn as reported by JDD would
be good news for Bouygues in our view given that Bouygues Telecom is not in a position to
deliver positive FCF for some time. That said, we struggle to understand why CEO Martin
Bouygues appears to have changed his mind about divesting Bouygues Telecom, having
longed ruled out such option. We assume he may prefer to hold a significant minority stake
in Orange in the long term rather than take a full cash offer. Whatever the case, the
regulatory risks cannot be ignored. If recent events in Denmark are anything to go by (see
‘Danish merger falls apart’), a cut in Telecom players in France from four to three may not
get a simple nod from regulators, even if we think Iliad is likely to remain an aggressive
player post deal. For example, we think the regulators could demand the sale of some
assets to a third player (i.e. other than Iliad/Free Mobile and Numericable-SFR) to maintain
a good level of competition in France. In which case the transaction price would have to be
discounted to account for the arrival of a new player, putting the valuation of Bouygues
Telecom under pressure while potentially reducing the attractions of a deal for Orange,
putting the deal itself at risk. Overall, very high regulatory risk combined with uncertainties
regarding the ability of Orange to make asset disposals on good terms underpin our
cautious stance on this (theoretical) transaction and thus on Bouygues. If successful, such
a transaction would be positive for the valuation of Bouygues stock, albeit likely partially
offset by a higher holding discount to capture a new minority stake in Orange, on top of
discounts linked to the 29.4% stake in Alstom and the 43.5% stake in TF1.
* How we value the stock Our €29 target price is based on our SOP valuation, which is
derived from a DCF for all divisions (5.0x EV/EBITDA for Holding Co, 8.15x B-Tel, 5-7x
Construction, 9.0x Real Estate) and SG's target prices for TF1 and Alstom. Sell.
* Events, catalysts & risks to price target, rating & recommendation 24 February FY 15
results. Risks: B-Tel returns to growth; B-Tel commands a materially higher valuation than
our model; material improvement in construction operations.