Orange CEO Stephane Richard may think he’s the only person who can consolidate France's telecoms industry. The question is why he'd bother.
The state-backed phone company is weighing whether to buy smaller rival Bouygues Telecom to take the French market back down to three operators after years of damaging price wars. A takeover could ease competitive pressure by eliminating the most aggressive broadband price-cutter in the country, and possibly offer 4 billion euros ($4.3 billion) to 7 billion billions in savings, according to Jefferies.
Yet there's also the suspicion that it would be of greater benefit to the billionaires behind Richard's three big rivals: Martin Bouygues, Xavier Niel and Patrick Drahi. Bouygues would welcome a partial retreat from a telecoms business that's lost money in recent years, while the remedies attached to any Orange-Bouygues deal would almost certainly favor Niel's Iliad and Drahi's Numericable-SFR.
Orange arguably needs consolidation the least since it already has France’s best network and biggest customer base. So why take on the many risks of trying to get a deal past wary antitrust regulators? They'd have valid concerns about bringing together two operators that control 55 percent of France's mobile market (see chart below).
To convince regulators, Orange would have to offer remedies to protect against higher consumer prices, and these would mean spin-offs to competitors. Low-cost Iliad is the only feasible buyer for Bouygues's mobile network and much of its spectrum, so would be a linchpin for any deal. Patrick Drahi's Numericable-SFR would have to take on some customers, and would probably demand a chunk of Orange's high-margin business subscriber base.
Orange advisers appear aware of the difficulties of a deal and will offer the usual promises of only doing something that creates value. But if they push on, they'd be trying to something unprecedented in Europe: a former state-owned monopoly consolidating its home market from four to three operators. Although similar deals have been waved through in Austria, Germany and Ireland and ones in Britain and Italy are under review, none has involved a market leader increasing size.
And even if Richard succeeded, Orange might be saddled with thousands of Bouygues employees it doesn’t need. The French state, owner of 23 percent of Orange, would probably want guarantees against lay-offs.
The CEO has long argued that France can't support four operators profitable enough to invest in network infrastructure. But that's a bigger problem for his three smaller rivals.
Martin Bouygues would clearly prefer to sell his business to state-backed Orange than to Drahi or Niel, the noisy new kids on the block. The proposed structure of a deal would offer Bouygues an elegant way out, leaving him as the biggest shareholder in a combined Orange-Bouygues after the French government.
Richard, chief of staff to Christine Lagarde when she was French finance minister, may be serving his country by offering an equally graceful way to tidy up its telecoms market. For Orange investors, that might not be so seductive.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
(Corrects Ebitda margin figures in first chart.)
To contact the author of this story:
Leila Abboud in Paris at email@example.com
To contact the editor responsible for this story:
James Boxell at firstname.lastname@example.org