Orange, Bouygues Confirm Preliminary Talks Over Telecom Unit

  • No `predefined outcome' sought in discussions, Orange says
  • Deal would reduce French mobile-phone market to three players

Orange SA is in talks to acquire Bouygues SA’s telecommunications unit in a 10-billion-euro ($10.8 billion) transaction that would boost profits in the French mobile-phone market by reducing competition.

There’s no calendar or “predefined outcome” to the talks, Orange said Tuesday, confirming a report last month by Bloomberg News that the companies were in early discussions. The companies are evaluating selling some assets to rivals Numericable-SFR SAS and Iliad SA to help pass regulatory hurdles for a deal that would cut the number of wireless providers in France from four to three, people familiar with the matter said, asking not to be named discussing private deliberations.

French phone carriers have struggled to sustain domestic sales and earnings growth since Internet-service provider Iliad entered the mobile market in 2012 with discounted offers. For Bouygues, the increased competition wiped out the profit of its telecommunications unit, which had been a cash cow for the construction company.

Bouygues Telecom may be valued at about 10 billion euros, Vincent Maulay, an analyst at Oddo Securities, estimated last month. In the deal, Bouygues would get a stake of about 15 percent in Orange and 2 billion euros in cash, and the duo could sell as much as 5 billion euros of assets to get antitrust approval, Le Journal du Dimanche reported Sunday, without citing sources. Spokesmen for the two companies declined to comment on possible terms of a transaction.

Bouygues’ stake in television company Societe Television Francaise 1 had been part of early talks, but isn’t part of the negotiations any more, one of the people said.

‘Healthier’ Environment

“Consolidation in the French telco market would be welcome as it would increase the odds for a healthier competitive environment,” said Nuno Matias, an analyst at Haitong Bank, in a research note today.

French carriers tried unsuccessfully to go from four to three through a variety of scenarios over the past few years. In June, Bouygues rejected a bid for its phone unit by Numericable-SFR, the mobile-phone and cable company controlled by Patrick Drahi, that valued the business at at least 10 billion euros. Chief Executive Officer Martin Bouygues and the board quickly decided against starting talks, saying a deal posed a risk to jobs and would face antitrust hurdles.

Orange has sounded out Altice NV, the owner of Numericable-SFR, and Iliad for their interest in possibly buying parts of Bouygues Telecom, including network and retail assets, though it’s too early to discuss specifics with rivals, the people said. Representatives for Altice and Iliad declined to comment.

Shares of Orange rose 0.9 percent to 15.34 euros at 1:45 p.m. in Paris. Bouygues added 1.2 percent to 37.62 euros. Numericable-SFR jumped as much as 16 percent to 38.31 euros, the biggest gain in more than six months, and Iliad climbed as much as 3.6 percent.

Consolidation Wave

“As it is interested in opportunities that would enable it to bolster its long-term presence in the telecoms sector, Bouygues announces that preliminary discussions have started with Orange to look at the possible options,” Bouygues said in a separate statement.

Orange’s plans reflect a wave of consolidation that has swept Europe’s telecommunications industry, as well as prompted phone and media companies to seek alliances. British phone company BT Group Plc last year agreed to buy the U.K.’s largest wireless carrier EE, which is half owned by Orange, for about $19 billion. In France, billionaire Drahi acquired SFR to create Numericable-SFR, and bid for NextRadioTV to take over one of the country’s biggest news channels.

Europe’s competition authorities have been the biggest obstacle to such deals. In September, TeliaSonera AB and Telenor ASA were forced to scrap the merger of their Danish businesses after the European Commission opposed the deal that would have reduced the number of competitors in the country from four to three. 

These talks “should face heavy scrutiny from a regulatory standpoint. In that sense we would expect that only through significant remedies should such a combination be possible,” said Matias at Haitong.

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