Billionaire Martin Bouygues is eager to sell his eponymous French telecommunications business to Orange after refusing four offers in the past two years. His change of heart reveals a larger truth: it's getting harder to make mobile-only businesses work in Europe.
The region is hurtling towards an era of convergence, where customers buy their mobile and fixed lines, broadband and television from one provider to get a discount. The trend is advanced in France and Spain, gaining ground in the Netherlands, and starting in Germany and Britain.
That puts companies with historical roots in mobile like Bouygues in a strategic impasse. Hutchison, backed by Hong Kong billionaire Li Ka-Shing, is also looking isolated: it remains mobile-only in the six European countries where it operates.
For Bouygues, which turned down a 10 billion-euro cash-and-stock offer from billionaire Patrick Drahi's Numericable-SFR last year, the reckoning came sooner than expected. Unable to keep pace with his competitors' spending on building high-speed fibre lines to homes, and forced to rent fixed-line capacity from Numericable-SFR, Martin Bouygues' window of opportunity was closing. The chart below shows how both the business's revenue and cashflow are falling.
So Bouygues is in talks to sell the mobile phone business to Orange -- in an all-stock deal that, if successful, would give it a stake in France's former monopoly alongside the government. Half of Orange's customers already buy their mobile and fixed-line services in bundles.
While Bouygues tries to sell, Hutchison is doubling down on European mobile. It has already bought competitors in Austria and Ireland, a move that helped it swing in to operating profit in 2012 after year of losses. It's seeking regulatory approval for similar deals in Italy and England, where it's buying O2 from Telefonica.
The two deals will create about 10 billion euros of cost savings from combining networks and closing stores -- but simply delay a decision on how to deal with the convergence threat.
In Italy, Hutchison has agreed to merge its 3 Italia unit with Vimplecom's Wind to create the biggest mobile provider by subscribers. If it can get that deal past Brussels antitrust watchdogs, then it will have a fighting chance since Italy has been the slowest country to adopt all-included bundles. There are no cable operators to compete with Telecom Italia, so little incentive for the companies to push converged offers.
Britain is more of a headache: Broadband leader BT has just bought EE, the country's biggest mobile operator, putting the market on the path to convergence, and it's just a question of how fast and how painful the discounting will be.
Unfortunately, the concessions that Hutchison will likely be forced to offer to win regulators' approval for its O2 purchase could accelerate the shift. Cable operator Virgin Media and pay-TV company Sky are both interested in renting out capacity on Hutchison-02's combined network as they pursue their own convergence strategies.
Hutchison, whose empire ranges from real estate to ports, isn't under immediate pressure -- the European telecommunications business accounts for less than a fifth of group Ebitda. Expansion in Britain and Italy should buy it a few years of revenue growth and substantial cost savings. The company thinks it can thrive as a mobile-only player -- as long as it gets critical mass and enough mobile spectrum to compete.
The fate of Martin Bouygues shows the ground is shifting under Hutchison's feet. Even Li Ka-Shing may eventually be forced into a similar choice to the one Bouygues is making.
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