Tech

Leila Abboud is a former Bloomberg Gadfly columnist.

Like many phone companies, France's Orange would like to think of itself as a nimble technology innovator. Yet the two deals it unveiled on Tuesday (one definite, the other potential) underline a more unflattering truth: like all telecoms operators, Orange is basically a boring utility where scale matters far more than invention.

In the definite deal, Orange announced plans to branch into mobile banking in France through a tie-up with insurer Groupama, reflecting the recent fashion for all things fintech. Of greater interest to the market, though, is the confirmation of talks to buy domestic rival Bouygues Telecom.

Of course, the relative scale of the two transactions -- Bouygues Telecom's price tag is about 10 billion euros ($10. 8 billion), while the mobile banking foray targets 400 million euros of sales by 2018 -- explains the disparity in interest.

But there's also something else European telecom operators don't like to admit: Investors are rightly dismissive of their efforts in recent years to boost sales by branching out into new digital services such as mobile banking. They simply haven't delivered any real financial benefit.

Telecoms operators don't want to be a so-called "dumb pipe" selling connectivity, while sexy Internet companies such as Google and Facebook reap the profit from services. So companies from Spain's Telefonica to Deutsche Telekom have tried everything under the sun to move up the digital value chain, hyping each effort as the next big thing.

Yet most of these efforts have failed. Mobile advertising, funding start-ups, smart electricity meters, remote healthcare; the list is long and dispiriting.

In Europe, the only tried and trusted way to boost profitability and cash flow is buying domestic rivals, thereby reducing competition, which explains Orange's pursuit of Bouygues. Cross-border deals such as Orange's interest in Telecom Italia remain a mirage so far because the financial benefits are uncertain. 

But billions in cost savings can be made by bringing a country's telecoms networks together, closing shops and firing staff, while margins are also helped by the ability to hike prices and lower marketing and customer retention costs. Hutchison Whampoa has benefited from such deals in Austria and Ireland, and is seeking approval for a similar one in the U.K., while Telefonica is enjoying the fruits of its 2014 German mobile deal.

Admittedly, European regulators have become more wary lately about waving through deals that cut the number of national mobile operators from four to three, meaning there's a real risk that Orange's Bouygues bid will be rejected.

But if it can get past those concerns, the benefits could be instant. If Orange can raise prices on mobile by only one euro per month for its 27 million French customers, it would generate additional revenue of roughly 340 million euros at little additional cost. The benefit would flow straight to the bottom line in France, which accounts for two-thirds of group Ebitda.

Orange Slide
Europe's fourth-biggest telecom carrier by market value has seen declining sales and earnings
Bloomberg Data

Barclays estimates Orange could boost free cash flow by 10-20 percent with the Bouygues deal, even though it will surely have to sell assets and shed customers to win approval from antitrust authorities. Analysts estimate cost savings at anywhere from 4 billion euros to 7 billion euros depending on how much Orange has to dispose to local rivals Iliad and SFR-Numericable in remedies. 

That's why Orange boss Stephane Richard is trying to make this deal happen even though the execution risk is high and he'd be doing a big favor to billionaire competitors Xavier Niel and Patrick Drahi, as explained in a previous column. Building Orange into a mobile banking powerhouse is just a sideshow. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net