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Orange discussing €10 billion purchase of Bouygues Telecom: regulatory concessions may be too hard to swallow.

by Philip Kendall | Jan 04, 2016

French newspaper, le Journal de Dimanche, reports that Orange and Bouygues have signed a confidentiality agreement with a view to Orange acquiring Bouygues Telecom for €10 billion. The price consists of €2 billion in cash and a 15% stake in Orange, which would make Bouygues the second largest shareholder in Orange behind the French state.

The French mobile market has been a challenging environment since Free’s entry as the fourth network operator in January 2012. According to our Wireless Operator Performance Benchmarking
database, the three incumbent operators had previously enjoyed service revenue of €2 billion and EBITDA of €750 million per month. By early 2014 revenue was below €1.5 billion per month and EBITDA below €500 million. With a significant rebalancing of pricing levels, operator finances have begun to improve in 2015 with service revenue up 3% annually in Q3 2015 and EBITDA up 8%.

So far, the quest for economies of scale through market consolidation has seen Altice/Numericable acquire SFR, but the government has not supported attempts to reduce the number of mobile operators from four to three. The government has warmed a little, however, since it came out against Numericable’s attempted acquisition of Bouygues Telecom in June 2015.

With Altice and Free’s Iliad gaining some scale from international operations, Bouygues does seem the least able to withstand further competitive intensity.  A combined Orange-Bouygues entity would control 49% of retail mobile subscriptions and 58% of mobile service revenue in France—an M&A scenario which might be hard to swallow even with improving government sentiment towards consolidation.

Asset disposals seem the most likely route to securing regulatory approval for the acquisition:

  • Mobile network: Orange & Bouygues own 57% of mobile spectrum and have much larger 4G LTE networks than either SFR or Free (e.g. as seen in this data from Arcep). A sale of spectrum and sites seems inevitable, with Free the more likely buyer;
  • Mobile customers: SFR is also reported to be interested in the low-cost subscriber bases of Bouygues and potentially Orange served by their sub-brands, a segment where SFR is not particularly strong. The B&You and Sosh.fr brands account for 7% of French connections, though a much smaller share of service revenue. Any evaluation of market power based on revenue would really require Orange to sell more valuable customers too;
  • Mobile stores: Bouygues’ 600 retail stores have also been floated as potential assets for disposal, a footprint which would naturally involve significant overlap with Orange’s network of c. 950 stores under direct ownership or exclusive partnerships;
  • Broadband assets: the deal would also take Orange’s share of the fixed broadband market just over 50% of lines, raising the potential for customer divestitures and network sales (e.g. fiber).

These potential asset disposals may be hard for Orange to swallow. While they would allow it to recoup some of the cost of the acquisition, it can be hard to extract market value for assets in these situations, as EE found when it gave 1800 MHz spectrum to Three following its merger. We don’t expect this acquisition to close any time soon as Orange’s profit maximization motivations come up against the French government’s desire not to lose face.

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