Bouygues Negotiates $2.5 Billion Mobile-Asset Sale to Iliad

Bouygues SA, seeking to preempt antitrust concerns over its proposed wireless merger with Vivendi SA’s SFR, is in talks to sell spectrum and its network to Iliad SA for as much as 1.8 billion euros ($2.5 billion).

An agreement is subject to Bouygues winning SFR, and the talks will allow Bouygues Telecom to make its case to France’s competition authority “from the outset with measures designed to maintain a competitive market for the benefit of consumers,” Bouygues said yesterday. Iliad, the discount mobile-service provider under the Free brand, will finance any deal with existing resources and debt, without the need to raise capital.

The talks signal the construction-to-media conglomerate led by Martin Bouygues is making a push to avoid a lengthy regulatory review of a deal to create a carrier with more than 21 million subscribers to rival Orange SA. Bouygues and Altice SA have begun informal meetings with French officials as each side seeks to convince Vivendi to choose its bid for SFR, France’s second-largest phone company, people familiar with the talks said.

“Politicians in France simply can’t make a choice other than Bouygues for SFR after they spent all this time criticizing fiscal exile, saying there’s too much competition in French telcos and worrying about jobs,” Iliad founder Xavier Niel said at a press briefing in Paris today. “The Bouygues scenario checks all the items on that list.”

Valuation Soars

Negotiations between Bouygues and Iliad went on for about three days, Niel said.

Bouygues, bidding against Altice and its Numericable SA unit for SFR, said last week its offer -- 10.5 billion euros in cash plus wireless assets -- values SFR at 14.5 billion euros, or about $20 billion, before synergies with its own Bouygues Telecom unit. Altice’s proposal also values SFR at about $20 billion and includes a mixture of debt, cash and equity, people familiar with the matter have said.

Iliad jumped 11 percent to close at 210 euros in Paris, taking its gains this year to 41 percent and valuing the company at 12.1 billion euros. The stock trades at an enterprise value of 12.2 times earnings before interest, taxes, depreciation and amortization, compared with the 6.5 times average for Europe’s telecommunications industry, according to data compiled by Bloomberg.

‘Potential Upside’

Bouygues rose 8.7 percent to 32.69 euros for a market value of 10.4 billion euros. Numericable slumped 12 percent to 24.90 euros. Altice lost 7.1 percent to 27.51 euros.

Robin Bienenstock, a Sanford C. Bernstein analyst, estimates Bouygues’ offer is valued at about 5.2 times SFR’s 2013 trailing Ebitda, while Altice’s implies a multiple of 4.9 times. Both figures exclude synergies from a merger.

Iliad said today its 2013 profit rose 42 percent to 265 million euros, as sales climbed 19 percent to 3.75 billion euros. The carrier said it aims to have a 25 percent share of the French mobile-phone market, from 12 percent at the end of December, without giving a specific timetable.

Assets under discussion between Iliad and Bouygues include Bouygues’ wireless network and some of its spectrum for 2G, 3G and ultra-high-speed 4G technology. Barclays Plc analysts estimate Bouygues’ network includes 15,000 transmission towers and Iliad’s about 3,000. Bouygues also holds larger quantities of spectrum.

Niel’s Bet

Iliad is also open to a looking at Bouygues as a merger target in the event Vivendi chooses to combine SFR with Altice, according to a person with knowledge of the matter, who asked not to be identified discussing internal deliberations.

“We’ve always been there to agitate competition in France and we don’t plan to stop,” Niel said today.

Gaining new network infrastructure from Bouygues could allow Iliad to stop buying capacity from Orange, for which it pays between 500 million euros and 700 millions euros each year.

Patrick Drahi, who controls cable operator Numericable through Altice, is arguing to regulators that his plans wouldn’t reduce the number of mobile carriers in France and would accelerate the deployment of ultra-high-speed networks, the people said.

The group that succeeds in wooing France’s Industry Ministry and Competition Authority stands a good chance of convincing Vivendi to accept its offer. The case is also a precursor of future battles over telecommunications mergers elsewhere as European phone companies look to consolidate to cope with rising network costs and slow growth.

Peugeot Precedent

Opinions within the French government may vary. Industry Minister Arnaud Montebourg, who has criticized job cuts at companies including Peugeot SA during his tenure, is most concerned with protecting employment and the strength of French companies, one of the people said.

Montebourg is open to a possible reduction in the number of mobile carriers, provided robust competition continues, he told newspaper Le Parisien in an interview published yesterday.

The Competition Authority, which must sign off on any merger, is more concerned about preserving the broadest range of consumer choice in the mobile market, the people familiar with the talks said.

The agency plans to also examine issues related to fixed and broadband telecommunications, as well as media-content production and distribution, because billionaire executive Martin Bouygues controls TF1, France’s largest free television channel by audience, and Vivendi owns Canal Plus, the biggest pay-TV channel, two of the people said.

German Case

A Drahi bid would probably be approved more quickly than the Bouygues offer, two of the people said. It may take the Competition Authority nine months to fully examine the sale of SFR, with exact timing depending on the offers, president Bruno Lasserre told Le Figaro.

In its discussions with regulators, Bouygues will argue that a reduction to three operators in the French market from four is different from that in Germany, where European Union regulators are challenging the merger of Telefonica SA and Royal KPN NV’s local units, the people said.

The key distinction, in the company’s view, is that a French deal would leave intact Iliad -- which two years ago started offering packages as cheap as 2 euros a month -- while the German transaction will absorb KPN’s discount-focused E-Plus division, they said.

A drawn-out regulatory process may be a challenge for Vivendi, which has announced a shift in strategy to refocus on media assets and plans to split SFR and list it separately by July 1. The company is due to submit its plans to shareholders at a June 24 annual meeting.

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