SFR Group : M&A may resume in 2017. Mid-term de-leveraging prospects in Europe remain intact, though

Altice’s net leverage should remain flat in Europe in 2016 (4.9x) and start to improve in 2017 (4.6x) owing to additional cost savings in France (redundancy plan) and in Portugal. However, FCF will remain soft this year (capex efforts, restructuring costs) before a rebound in 2018, which will support a leverage improvement towards the 4.0x target in Europe. M&A activity may resume this year after a break observed in 2016 to integrate its new assets, and US cable operators will likely be on the radar. Consolidation talks in France could also be revived after the presidential elections. This might lead to a temporary increase in leverage as well as new debt supply. - We prefer Altice Luxembourg’s bonds (Buy maintained) and the 2025 notes are our top pick at Altice. At Altice International, we lower our recommendation to Neutral (vs. Buy) on the 2023 secured notes and to Reduce (from Neutral) on the 2022 secured notes / 2023 unsecured notes given their tightening Ytw. We raise our reco. on SFR’s 2022 secured notes to Buy (vs. Neutral) given their attractive Ytw, and confirm our Neutral recommendation on the 2024 secured notes. - >Support factors - • #1 or #2 position in its core markets. PT is the incumbent operator in Portugal (#1 except in pay-TV). In France, SFR has an overall #2 position in France.• The integration of new assets could generate substantial synergies. We believe that the annual EBITDA synergy targets (€ 200m at PT, € 730m at SFR) will be exceeded. There is room for EBITDA margin improvement: the mid-term guidance is 50% at Altice International and 45% at SFR, vs. our respective forecasts of 47.5% and 36.5% (SFR excluding acquired media assets) for 2016.• Altice’s fiber (FTTx, cable) networks provide a bandwidth advantage, except where fiber networks overlap. SFR and Portugal Telecom have significant fiber coverage (9.3m and 3.0m households at end-2016, respectively). • Comfortable liquidity position with no significant debt maturities before 2022.Points to watch - • Intense competition, especially in France, Portugal and Israel.• Execution risks linked to the integration of new assets and the achievement of synergy targets, although Altice's management has a positive track record in this area. • Leverage is aggressive. The holdco (Altice NV) net leverage was 5.8x at end-September 2016. In Europe, the net leverage was 4.0x at SFR, 3.8x at Altice International and 5.0x at Altice Luxembourg. We note that Altice aims to reduce its net leverage from its current level (long-term targets of 4.0x in Europe and 5.0x-5.5x in the US).• Large acquisitions may resume in 2017, after a break in 2016. Altice will likely participate to the consolidation of its existing markets (in particular the US) and may explore the entry into new markets. This may lead to a re-leveraging and new debt supply.