Bouygues Turns Into Iliad Target After SFR Loss: Real M&A

After losing a bidding war for SFR, France’s second-biggest mobile carrier, Bouygues SA’s best move may be to turn from buyer to seller.

Vivendi SA agreed last week to start exclusive talks about merging its SFR phone business with billionaire Patrick Drahi’s Numericable Group, turning down a rival offer from fellow billionaire Martin Bouygues’s construction and telecommunications company. While the failed bid included an agreement to have rival Iliad SA buy parts of Bouygues’s phone business to preempt antitrust concerns, Iliad is open to discussing a purchase of the entire Bouygues Telecom unit, people with knowledge of the matter said.

Iliad, now France’s fourth-largest wireless operator, could move into third place by buying Bouygues Telecom. Iliad’s 32 percent stock rally this year gives the company currency that could come in handy for a deal, and its profit multiple is now the highest of all large European telecommunications carriers, according to data compiled by Bloomberg. Bouygues could get about 5 billion euros ($6.9 billion) for the phone unit, according to Societe Generale SA and Natixis, not far from the market value of the entire company less than two years ago.

“Bouygues is back to the same situation it was in two weeks ago, with a mobile market of four players and little prospect for improvement,” said Benoit Maynard, an analyst at Natixis. “The market will now be looking for a merger between Iliad and Bouygues Telecom.”

Representatives for Bouygues and Iliad, both based in Paris, declined to comment.

Competing Bids

Bouygues wanted to buy SFR to create a carrier of more than 21 million contract wireless customers, closing a gap with market leader Orange SA. Vivendi preferred the proposal from Numericable, France’s largest cable operator, which offered

11.75 billion euros in cash and a 32 percent stake in the enlarged company. Bouygues had bid 11.3 billion euros in cash and a 43 percent stake.

Iliad entered the mobile market in January 2012 and sparked a price war by selling discounted wireless phone packages. The company had 8 million clients at the end of 2013, or 12 percent of the market. Buying Bouygues Telecom would bolster its customer count by about 9.9 million subscribers.

“Such a bid from Iliad could become even more probable if Bouygues steps up its aggressive strategy in the fixed broadband segment, which represents Iliad’s cash cow,” Nicolas Hue de La Colombe, an analyst at Credit Agricole SA who values Bouygues Telecom between 4.5 billion euros and 5 billion euros, wrote in a note. He said talks may materialize by the end of the year.

Phone Value

Bouygues introduced a so-called triple play discount package last month that bundles Internet, fixed phone and TV services. The company, which had 11 million mobile-phone clients and 2 million fixed broadband subscribers at the end of 2013, said at the time it aims to gain 5 million triple play customers as soon as possible.

At 5 billion euros, Bouygues Telecom would represent more than half of its parent’s entire market value of about 9.5 billion euros yesterday. That also compares with Bouygues’s market value of 5.5 billion euros as recently as November 2012.

Iliad shares reached a record 215 euros on March 12. They added 1.6 percent to 199.35 euros at 2:45 p.m. in Paris for a market value of 11.6 billion euros. Bouygues dropped 1.1 percent to 29.54 euros.

Iliad had net debt of about 1 billion euros at the end of

2013. Chief Financial Officer Thomas Reynaud said this month that the company has “ample room” to borrow more.

Bouygues Pressure

Bouygues’s telecommunications business, which represents about a third of its conglomerate parent’s earnings before total earnings before interest, taxes, depreciation and amortization, has come under pressure amid price wars in France. The phone unit’s Ebitda dropped 31 percent last year from 2011, and revenue declined 19 percent over the same period.

A sale of Bouygues Telecom for 5 billion euros “would be a good price for Bouygues shareholders, considering its lack of critical mass in the broadband market and ongoing pressure on mobile operations,” Stephane Schlatter, an analyst at Societe Generale, wrote in a note. “A deal would also ease uncertainties about the telecom business and thus contribute to reduce the holding discount.”

Bouygues could use proceeds from selling the phone unit to pursue other businesses as part of its conglomerate strategy, Credit Agricole’s La Colombe said. In addition to the 90.5 percent stake in Bouygues Telecom, the company owns 44 percent of TF1, the nation’s biggest broadcaster, and 29 percent of train and power-equipment maker Alstom SA.

Earlier Interest

In the past, Bouygues has exited businesses such as offshore exploration and water treatment when the chief executive officer was dissatisfied with their growth prospects. In April 2012, billionaire Bouygues didn’t rule out an initial public offering of Bouygues Telecom further down the line.

Iliad’s founder Xavier Niel had examined Bouygues Telecom among other assets in the past two years, two people familiar with the matter have said. Bouygues wasn’t a seller of Bouygues Telecom and antitrust hurdles also deterred a deal from happening, people familiar with the matter have said.

While Bouygues is unlikely to shift its telecommunications strategy right away, it hasn’t ruled out analyzing options for its mobile business, said two people familiar with the matter, who asked not to be identified because the deliberations are private.

“If Bouygues missed the SFR deal, it was clear that it could go talk to Iliad instead,” said Conor O’Shea, an analyst at Kepler Cheuvreux.

Other Options

Even though French Industry Minister Arnaud Montebourg this month said he favors a return to three carriers in the country, there’s no sign that Iliad and Bouygues will rush into a sale.

Iliad instead could pursue organic growth, a strategy that has boosted revenue so far, said Natixis’s Maynard, who values Bouygues Telecom at 5 billion euros. Buying Bouygues Telecom also would dilute earnings, Maynard said.

The closing of Numericable’s SFR purchase is also likely to play a role in decisions about Bouygues Telecom. While Drahi predicted a final contract with Vivendi will be signed before the end of the month, a failed Numericable-SFR deal would open more possibilities for Bouygues.

Any deal with Iliad and Bouygues may be difficult as the two have struggled to see eye-to-eye in the past. Martin Bouygues likened Iliad to a cuckoo in 2012, after Niel had said French operators were treating their customers like “pigeons” until he entered the market.

Consolidation Trend

Consolidating the French market more would put an end to the fight between Bouygues and Iliad over discounted packages, said Claudio Aspesi, an analyst at Sanford C. Bernstein & Co.

Such consolidation would follow a trend in other parts of Europe. In Spain, Vodafone Group Plc agreed to buy cable provider Grupo Corporativo Ono SA in a $10 billion deal this week. Vodafone last year paid more than $10 billion for Kabel Deutschland Holding AG, Germany’s largest cable company.

“France will settle into a market of three broadly integrated players,” Aspesi said. “It seems likely that, one way or another, Iliad and Bouygues will end up in each others’ arms.”

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