Billionaire Carve-Up Is Better Off Dead
The plunge in French telecoms shares on Monday morning was inevitable after the collapse of talks that would have cut the number of operators in the country from four to three.
Investors nursing their wounds won't see it this way, but it’s still probably better that Orange’s effort to buy Bouygues Telecom and split its assets with two rivals has failed. The deal would have been a carve-up that required its advocates to suspend basic fairness.
Sure, the three remaining operators would’ve become more profitable in a less cutthroat market where they could have charged more, probably earning up to 2 points of additional margin. Goldman Sachs estimated the consolidation boost to be worth 10-20 billion euros ($11.4 billion-$22.8 billion.)
Billionaire Martin Bouygues would’ve been able to declare victory because of the generous 10 billion euro price and his elevation to Orange’s second biggest holder. Even the French government, whose last-minute demands to limit Bouygues’ power helped kill the deal, would have benefited as its 23 percent stake became more valuable.
But this kind of consolidation -- the number one buying the number three and then selling off two-thirds to rivals -- is unprecedented in Europe. For good reason. Orange would’ve gotten even bigger and more powerful, especially in the high-end market serving the most profitable businesses and consumers. And no one knows if the remedies to sell most of Bouygues’ spectrum and some of its network to Xavier Niel's Iliad, and more than half of its customers and some towers to Patrick Drahi's Numericable-SFR would have worked to protect competition. Prices would probably have risen over time.
Orange had of course argued that easing price pressure by taking one operator out of the market would have freed the others to invest more in networks. But the way the deal was negotiated was troubling. Orange boss Stephane Richard said he was the only one who could conduct shuttle diplomacy between the three billionaire owners of the other companies involved, who aren't on the best of terms, and the state. Personalities aside, such deal talks lead to revealing commercially sensitive information such as contracts governing mobile tower sites, customer data, and network investment plans.
In Brazil when Oi, Telefonica, and America Movil explored buying and breaking up Telecom Italia’s Tim Brasil in 2014, they had to form a special purpose acquisition vehicle and name a trustee to negotiate on their behalf. Those legal constraints aimed to ensure the companies did not collude.
Yet in France no-one blinked when three telecoms companies negotiated for four months to try to eliminate one of their competitors. Is Brazil more of a paragon of corporate governance than France?
Another troubling aspect was how Orange ensured that French regulators would have reviewed the deal and not Brussels, where antitrust watchdog Margarethe Vestager is skeptical about the merits of more telecoms concentration.
There's a phrase in French that captures what an Orange and Bouygues deal might have been: "Un petit arrangement entre amis” or a cozy arrangement among friends. While it's hard to describe the protagonists in this drama as friends, the deal that's fallen apart certainly looked cozy.
A straight acquisition of Bouygues by Iliad or Numericable-SFR, both of which have been proposed in recent years, would be less amicable but easier to defend from an antitrust and governance point of view. If only Martin Bouygues would agree.
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