Upstart Billionaire Goes Establishment

An Orange-Bouygues deal would cement Xavier Niel's place as a telecoms industry mainstay

Once a rebel who delighted in insulting rivals as lazy monopolists, billionaire Xavier Niel has mellowed in middle age and joined the French establishment. He's part-owner of Le Monde, pals around with the LVMH-controlling Arnault family and has been thinking about gate-crashing the British telecoms market.

Iliad Wins

Shares have risen more than French rivals since Orange-Bouygues talks first disclosed

Iliad, the low-cost carrier he founded in 1990, is maturing too. The double-digit sales growth it enjoyed after launching a price-slashing mobile operator in 2012 is slowing and its 13.2 billion-euro ($14.4 billion) market value is closing in on the 15.3 billion euros of France's second-biggest phone company Numericable-SFR.

Reaching Maturity

Iliad's rapid growth is moderating

Bloomberg Intelligence

Iliad's about to get even bigger if telecoms consolidation goes ahead in France. To win approval for its takeover of Bouygues Telecom, Orange will probably have to sell Niel much of Bouygues' network, some spectrum and stores. That would alter fundamentally Iliad's business model towards one that more closely resembles its rivals: a bigger staff, a large chain of shops, and more cash flow to protect.

That Iliad may cement its place at the big table is good news for long-suffering Orange and Numericable-SFR, who'd welcome some relief from the fierce price cuts of the past few years if the number of French mobile operators is reduced from four to three. 

Earnings Drag

Iliad's mobile launch in 2012 has had an impact on its biggest rival Orange

Bloomberg Intelligence

The only snag is that Orange still needs to get its deal past the French government, which will probably conduct the antitrust review. Niel's Iliad has long been the "maverick" in the market: cutting prices, pushing all-inclusive bundled offers, and forcing larger competitors to invest in network upgrades to keep ahead.

The risk if France goes from four to three operators is that Iliad no longer innovates enough to ensure healthy competition. Would the maverick become fat and complacent? Even in concentrated markets -- telecoms with its high fixed costs and need for scale tends toward the oligopoly -- the presence of a maverick can help prevent cartels from forming.

So the game for regulators will be letting Iliad bulk up enough to take on Orange and Numericable-SFR, but not grabbing so much market share that it becomes self-satisfied.  A person close to the talks said recently that Iliad shouldn't be given enough customers to hit its own long-term target of 25 percent share in mobile. 

Iliad's expansion

Low-cost carrier crashed France's cozy mobile market in 2012

Bloomberg data

An important concern is how Bouygues' 65 megahertz of mobile spectrum is divided between Orange, Iliad and Numericable-SFR. Macquarie analysts argue that competitive tension can be sustained as long as Iliad's mobile revenue share isn't boosted by the deal. Even if each of the three carriers ended up with one-third of France's mobile spectrum, Macquarie says, Iliad would still be hungry enough to keep prices low as it used the extra capacity to boost its sales by winning customers from the two rivals. As things stand, Iliad would have 20 percent of mobile revenue share versus 49 percent for Orange and 32 percent for Numericable-SFR.

In truth, French antitrust regulators don't have many options besides Iliad to try to protect competition. Few mobile virtual network operators survived the bloody price war sparked by Iliad's entry into mobile in 2012.

While the government won't want to return to the bad old days when three operators colluded to fix mobile prices, Orange clearly believes this deal can win over doubters. Niel's sitting pretty if it does.

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

    To contact the editor responsible for this story:
    James Boxell at

    Before it's here, it's on the Bloomberg Terminal.