Iliad emerges as the remedy taker
With Iliad announcing itself as the definitive remedy taker and a potentialfourth mobile operator in Italy, the 3 Italia/Wind JV appears increasingly likelyand we may see the deal approved ahead of the 8 Sept EU deadline. WhileIliad has been disruptive to the French market, our European telecom analystbelieves the impact of its entry in Italy will be less damaging given industryARPU is already low and competition fierce. We see significant EBITDA (~8%)accretion to CKH from the deal and with the potential market share lossmanageable (flat revenue for the next 3 years) and also roaming costs to bereceived from Iliad, this deal could be a key growth driver for CKH; retain Buy.
Something for everyone
Under the remedy package, Iliad will receive 2x35MHz of spectrum for €450m,several thousand macro sites in densely populated areas, a potential networksharing agreement covering rural areas and a roaming agreement with themerged entity. Wind/3 Italia, on the other hand, can offload excess networkassets at a reasonable price, receive roaming fees from Iliad and emerge withthe highest amount of 4G spectrum in the market. While the Wind/3 Italia JVwill lose subscribers to the new entrant (as it will take time to consolidate andbuild up its network to catch up to the market leaders), our European teamexpects that it can keep revenue flat for the next 3 years given a majority of thechurn will be at the low end prepaid customer segment.
Potential earnings and valuation impact from the deal
We estimate an 8% EBITDA accretion and 4% equity valuation uplift to CKHfrom the deal (due to additional debt taken on) and almost a tripling of the FCFof the JV. Furthermore, at the currently depressed valuation and lacklustergrowth environment, we think the deal could result in a re-rating of the stockas synergy benefits come through and CKH’s earnings and FCF start to grow.We have not included the JV in our forecasts yet given uncertainty around theD&A, interest costs, the roaming arrangement and the impact of asset sales.
Valuation and risks
We value CKH using a combination of SOTP and DCF. Key downside risksinclude: HKD appreciation, higher borrowing costs and economic slowdown.