Short-term pressure, mid-term benefits

We move our Credit opinion to Negative (vs. Stable). While we continue to think that the JV agreement is positive for Ziggo (strong fixed-mobile player with leading market positions, material cost synergies and cross-selling opportunities), we expect short-term pressure on EBITDA (EUR 1.65bn forecast for 2017, down -10% from a LTM proxy of EUR 1.84bn in 3Q16) on the back of competitive pressure, regulatory headwinds and integration costs. This will lead to a leverage peak of 6.0x at end-2017 (excluding synergies), before a gradual improvement from 2018 onwards on higher EBITDA and FCF. - We also change our recommendations to Reduce (vs. Buy on the 2025 unsecured notes, Neutral on the secured notes) on a relative value basis. The Ytw of the 2024 notes is tight compared with HY cable bonds callable in 2019 while the 2025 and 2027 offer limited premium to compensate for the expected weak results in 2017. - - >Support factors - • Significant opportunity to cross-sell the cable customer base with mobile products (only 21% of fixed broadband customers subscribe to Vodafone mobile services) and triple-play packages (triple-play penetration was 63.4% of the total cable customer base in 2016, up from 60.6% in 2015) to a lesser extent.• Advanced cable network (maximum internet speeds of 300 Mb/s for residential customers and 500 Mb/s for B2B customers, only FTTH is superior to cable) and well invested mobile network (99.5% 4G coverage and 30% of mobile spectrum in the Netherlands).• The combination of Ziggo and Vodafone NL into a 50-50 JV has strengthened their business profile (convergent offers) and is expected to generate material synergies (EUR 210m of capex and cost synergies p.a. by 2021, as well as revenue synergies). The total NPV of synergies is estimated at EUR 3.5bn.• Shareholders with solid credit profile. The ratings of Vodafone (Baa1/BBB+) and Liberty Global (Ba3/BB-) are higher than the ‘b+’ anchor rating of VodafoneZiggo at S&P, although their joint control could limit potential support.Points to watch - • Intense competition in the Dutch telecom market, from KPN (aggressive promotions and fixed-mobile bundles) and smaller mobile operators (4 MNOs in total). Pro-forma revenues and EBITDA dropped by -2.3% and -5.9% respectively in 1Q17.• We expect a net leverage peak of 6.0x (excluding synergies) at end-2017 (vs. 5.3x at end-June 2016), before a gradual improvement on higher EBITDA and FCF.• Steady shareholder distributions. The JV intends to pay at least EUR 500m to its shareholders in 2017, leading to negative FCF after distributions.• FTTH technology (31% coverage) represents a threat.• Execution risks regarding the integration of VOD NL/Ziggo and the extraction of planned synergies, mitigated by the lessons learned from the UPC/Ziggo combination.