Vivendi’s Unloved SFR Wooed by Suitors Amid Merger Talks

SFR Store
An illuminated logo sits on display outside an SFR store, a mobile-phone unit of Vivendi SA, near a street cafe in Paris. Photographer: Balint Porneczi/Bloomberg

Vivendi SA’s SFR unit has gone from unloved stepchild to belle of the ball.

France’s second-largest mobile carrier is the subject of a three-way contest among Numericable SA, Iliad SA, and Bouygues SA, all of which are discussing potential acquisition offers, according to people familiar with the situation. Such a deal could replace plans to spin off SFR to Vivendi shareholders, as envisioned by the Paris-based company after a strategic review.

Vivendi and Numericable, the fixed-line operator controlled by billionaire Patrick Drahi, have negotiated on and off over the past year without coming to an agreement on price, people familiar with the matter have said. Liberum Capital Ltd. analysts value SFR at about 12 billion euros ($16.5 billion).

While talks with Numericable are the most advanced, Iliad and Bouygues are trying to derail those negotiations and overcome regulators’ skepticism about mobile mergers, said the people, asking not to be identified discussing a private matter. To make its case, Bouygues may argue that a merger of SFR and Numericable -- controlled by a financial investor with roots in private equity -- would result in job losses unacceptable to Socialist president Francois Hollande’s government, one of the people said.

European telecommunications companies are looking for ways to consolidate as costs rise for high-speed mobile networks and regulators impose new rules on revenue sources such as roaming.

Regulatory Hurdles

While mobile carriers in France have been eyeing consolidation for more than a year to stop a price war brought on by the arrival of a fourth carrier, their talks have never made it past the informal first approach because of regulatory hurdles. A deal between Iliad or Bouygues and SFR would reduce the number of full-service French mobile carriers to three, less than in the U.K., Spain, or Italy.

Bouygues and Iliad are betting French regulators can be persuaded to approve a mobile deal as Telefonica SA and Royal KPN NV try to merge their units in Germany, according to people familiar with the talks. The companies are also arguing that, after the French price war slashed profits, consolidation and more stable earnings would mitigate layoffs in the industry, one of the people said.

Telefonica said it was “optimistic” it can overcome objections it received today from European Union antitrust regulators over its plan to merge its German unit with Royal KPN’s E-Plus.

Spokesmen for Numericable’s biggest investor Altice SA, Vivendi, Bouygues and Iliad all refused to comment.

Price Wars

Vivendi was little changed at 20.64 euros at 9:20 a.m. in Paris. Numericable slipped 0.2 percent, Bouygues lost 0.3 percent and Iliad fell 0.2 percent.

The French telecommunications market needs to consolidate because of its “disastrous” shape, Bouygues Chief Executive Officer Martin Bouygues said at a news conference this week as he announced a discount package for Internet, fixed phone and television services.

Vivendi has argued so far that an IPO is still the main scenario for SFR. Listing SFR means Vivendi will have to convince investors that the phone company can preserve profitability and keep clients from leaving.

France’s Industry Minister Arnaud Montebourg, is open to a possible reduction in the number of mobile carriers as long as robust competition continues, said a person familiar with the government’s thinking. That would be a reversal of policy under former president Nicolas Sarkozy, who encouraged Iliad to offer mobile services, which it began doing under its Free brand in 2012.

Realistic Partner

Other government agencies, including the Competition Authority, would also have to sign off, and EU officials could intervene. Due to those obstacles, Vivendi views Numericable, which doesn’t have a mobile arm, as the most realistic partner for SFR, one of the people said.

Market leaders Orange SA, Vivendi, and Bouygues have struggled to maintain performance in their mobile units. Vivendi’s full-year earnings reported this week showed both sales and profits falling at SFR, while Orange’s average revenue per user in its home market slid 12 percent in the first nine months of last year.

Any suitor hoping to merge with SFR before its planned spinoff will have to persuade Vivendi, led by Chairman Jean-Rene Fourtou, to scrap plans for the unit’s flotation. Vivendi’s board is wary about agreeing to a deal with the outlook for the French mobile industry still unclear, two of the people said.