Billionaire Martin Bouygues needs to realize that when dealing with the French government, there's limited room for negotiation. An offer from Orange -- 23 percent owned by France -- to buy his eponymous telecommunications business is a good one that he should jump on.
Under the terms still being negotiated, the cash and stock offer would value Bouygues Telecom at about 10 billion euros ($11.3 billion), a generous 13.3 times Ebitda when compared with the 8 times premium applied in similar recent deals, according to Bloomberg data. Bouygues would get about 5 billion euros in cash and a stake in Orange of as much as 15 percent, making it the second-biggest shareholder after the state.
But after meeting separately last night, the two boards said talks aren't sufficiently advanced to make a decision.
The wrinkle is the French government, which faces national elections next year. First, the state is wary of approving a deal that will see country's number one player buy the number three -- an unprecedented development in Europe that could increase prices for consumers. Second, it needs to decide how, and if, it will share power at Orange with the billionaire.
The antitrust issues look the less onerous of the two: Orange will sell a chunk of Bouygues' customer base and part of the network to Patrick Drahi’s Numericable-SFR, while most of the mobile spectrum, the rest of the network, and some stores will go to Iliad. Even so, there's a risk the competition regulator will weigh in because even these remedies may not be enough to stop prices from creeping up.
The bigger sticking point is what relationship Bouygues would have with the state. The government doesn't want to relinquish its grip on Orange, where it holds three of 15 board seats, chooses the CEO, and generally uses its influence to protect jobs and ensure that rural areas get fast mobile and broadband coverage.
So far, Martin Bouygues has kept mum about how actively he would seek to weigh on Orange's future strategy. No doubt the government is worried about that.
He needs to reassure them, and has good grounds to do so. His family’s conglomerate, which also own road, construction and television businesses, has long done lots of business with the state. In 2014, when Bouygues was a minority shareholder in Alstom, he lent his shares to the government to facilitate a controversial deal to sell the French company's power unit to General Electric.
Bouygues, who's turned down three offers for his telecommunications unit in as many years, needs a deal more than he lets on. He risks being stuck with a business that has been loss-making and cash flow negative for most of the past four years, hurt by the arrival of low-cost competitor Iliad.
Although Bouygues claims his telecom unit can thrive on its own, it simply can't match Orange and Numericable-SFR's spending on its network, nor Iliad’s low-cost structure. Its move to slash the price of triple-play bundles to 19.99 euro a month two years ago merely expanded the price war without really solving its own problems.
In June, Bouygues rejected an offer from Numericable-SFR's owner, Patrick Drahi, that would have given him 9 billion euros in cash, and potentially a further 1 billion euros in cash or shares over three years. But Bouygues couldn't accept the idea of selling the part of the family empire he built himself to Drahi.
The tycoon won't get such a big check from Orange -- but he will get to stay in the telecommunications business, gaining a board seat alongside the government and an assured dividend stream. To be a minority in the biggest French operator is better than declaring defeat by selling to a company controlled by a rival billionaire. That should be enough.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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