CT announced that it will be merging its fixed and mobile operations and rebrand to Telefonica O2 CR. The merger is expected to result in financial synergies of up to EUR 700m (driven largely from the revenue line), about 50% of which will be realised over four years starting 2007. The merger is expected to have a neutral OIBDA impact in 2006, and management maintains its 2006 guidance of flat revenues and OIBDA. Management was unable to disclose merger and re-branding costs as they have not completed market analysis for rebranding and have not finalised discussions with TEF/O2. They were also unwilling to discuss how the enlarged balance sheet could influence dividend policy going forward, although they are maintaining their announced CZK 45 DPS proposal for 2006.
We view the merger positively, in that as stand-alone businesses, CT and ET would have remained under increasing pressure. In general, we are more optimistic on cost savings from such integration, than on incremental revenue generation. We believe the risk lies in potential integration and rebranding costs. We currently do not see any material impact from potential synergies on our recently increased margin assumptions. We maintain our fair value estimate of CZK 510, and our Sell rating on CT based on challenging valuations.