Please refer to important disclosuresat the end of this report.
Sector rating: Neutral
13 December 2006
LatAm field trip: M&A time
Strong operating momentum remains – M&A time is coming
During our recent field trip to Mexico and Brazil, we met most of the operators.Operating momentum remains generally strong and there are no big shifts in thecompetitive positions since last year. Change is going to come from M&A.
Telecom Italia had better sell TIM Brazil quickly
We believe that few parties are interested in TIM Brazil. America Movil (AMX) isthe likely buyer. TIM Brazil could be worth at best EUR9.6bn (100% EV)whereas press reports suggest prices between EUR9-11bn. In our view, thereare no regulatory barriers, but TI should act quickly to avoid the risk of adeteriorating commercial performance at TIM Brazil, asmanagement/employees will be distracted at a time when the market remainscompetitive. Many operators are already trying to lure TIM Brazil’s sales force.
Many options to create value for Telefonica
We believe Telefonica’s exposure offers many options that can create value.The merger of TIM/AMX in Brazil would add EUR2bn to our valuation of Vivo(raising it to EUR8.8bn). If TEF manages to obtain 100% of Vivo, it couldmerge the company with its fixed operations in Sao Paulo (Telesp), creatinganother EUR1bn of value through synergies. Finally, TEF could acquireTelemig/Amazonia, further consolidating the market. In Mexico, we believe itcould make sense for TEF to acquire a fixed operator to achieve critical mass.
Target price raised on TEF (+3% to EUR17.2), unchanged on TI and PT
We have raised our target price for Telefonica to EUR17.2 (7% upside) andreiterate our Outperform rating. We believe Telefonica remains the mostattractive large-cap incumbent to play telecom exposure. Our ratings andtarget prices are unchanged on TI (Neutral) and Portugal Telecom (Neutral).
Rating Price* Target Upside(EUR) price (downside)(EUR) (%)
Neuf Cegetel + 25.5 31.0 21Iliad + 66.8 80.0 20Eutelsat + 14.7 16.4 12Telekom Austria + 20.1 22.0 9SES Global + 13.0 14.0 8Telefónica + 16.1 17.2 7Vodafone Group (p) + 141.0 149.0 6Belgacom + 33.2 34.0 2Telenor (NOK) + 119.8 121.0 1Mobistar = 64.1 70.0 9Bouygues = 47.0 49.0 4Telecom Italia = 2.3 2.4 4Deutsche Telekom = 13.6 14.0 3Portugal Telecom = 9.8 10.0 2Cable & Wireless (p) = 161.5 163.0 0.9TeliaSonera (SEK) = 55.3 55.0 (0.5)KPN = 10.6 10.5 (0.5)Maroc Telecom = 11.6 11.5 (1)BT Group (p) = 296.0 280.0 (5)France Telecom - 20.1 19.0 (6)Tele2 B (SEK) - 93.0 80.0 (14)
Fastweb + 40.8 49.0 20Tiscali - 2.6 2.5 (2)
*Priced at 12 December 2006
Mathieu Robilliard Antoine Pradayrol
+33 1 42 99 84 06
Stuart Birdtmathieu.email@example.com Nicolas Didio
William Beavington (Marketing Analyst)
+44 207 039 94 firstname.lastname@example.org email@example.com
Price relative to DJ STOXX50
Telecom OperatorsRelative to DJ STOXX50