Econocom : Reflections on the possible soft call on the ORNANE

Tuesday 17 January 2017 - Equity data - Reco: Neutral - Target: € 15.40 - Equity Analyst : Nicolas David - [email protected] - +33-1 44 51 81 51 - ESG Analyst : not covered - Corporate Governance: na - / - / - 23 February 2017: Full-year 2016 results: - - - - Since our coverage initiation on the Econocom 2019 ORNANE in March 2015 (see our credit flash published on 30 March 2015), the Econocom share price almost doubled from € 7.44 to around € 14.12 currently. This performance stems from: 1/ organic growth at above its benchmark market; 2/ strong operating leverage resulting from synergies, the integration of Osiatis and productivity plans; 3/ leverage provided by acquisitions in the context of a still-sound balance sheet position; and 4/ share buybacks, delivering value accretion for shareholders. - Against the backdrop of a sharp increase in equity, the price of the Econocom 2019 ORNANE (on which we have been structurally buyers since March 2015), rose by 56%, from € 9.10 to around € 14.15. Its yield is now clearly negative (approx. -10%) vs. +1.6% at the time of our coverage initiation. - In our view, the upcoming soft call on the 2019 ORNANE is highly likely, given: 1/ a share price that is close to the trigger; 2/ the issuance of a € 150m Schuldschein partly, in our opinion, to refinance the ORNANE (possible cash component in the soft call for the principal of the CB); and 3/ the fact that the group has already taken steps to limit potential dilution by buying back shares and ORNANE bonds on the market. - Assuming the share price stays where it is (changes in the share price are difficult to anticipate over a very short time period although, in this case, the share price may technically be buoyed by the shares buy-back operated by the company), since the ORNANE commands a slightly positive premium, we would recommend profit-taking by selling the bonds to recoup the remaining premium. - For investors wishing to hold on to their ORNANE bonds, if/when the premium on the ORNANE becomes nil or negative (as a result of the increase in the share price) and if the issuer exercises the soft call in the event that the trigger is reached, we would advise them to convert the ORNANE at least 29 trading days prior to the dividend record date (which was set on 28 July in 2016). The dividend amount and timing is expected to be announced on 23 February when the full-year earnings results are out. - If the issuer does not exercise the soft call, conversion loses its appeal because the ORNANE helps to maintain convexity if the share price falls. - >