Mergers & Acquisitions

Orange may seek Bouygues merger

Sources point to early-stage talks, but antitrust hurdles would be high in ultra-competitive quad play and mobile market.

Last week Orange denied reports that it was in merger talks with Telecom Italia, but dropped strong hints that it was pursuing other acquisitions. Now it seems that its interest may be closer to home – it is said to be in early discussions with Bouyues, which owns France’s third mobile operator.

Orange is also interested in the media assets of diverse company Bouygues, said “sources familiar with the matter” who spoke to Bloomberg. The deal would be just the latest in a whirl of consolidation which has hit the French telecoms market since the launch of Free Mobile by broadband group Iliad. This sparked a price war in the mobile market, with Free harnessing WiFi and cellular homespots to lower its costs and undercut its rivals on cellular data. Recently it secured itself an improved spectrum position in France’s 700 MHz auction.

The pressure which Free has brought to bear on France’s three incumbent MNOs – Orange, SFR and Bouygues Telecom – has been accompanied by a drive towards offering quad play services, which France shares with most developed European markets. The need to offer a wider range of bundles services, and secure a bigger share of a consumer’s total comms and media spend, is even more urgent in this country because of the falling margins on mobile-only services.

These dual trends have seen Altice acquire SFR to accompany its cable operation Numericable and rival Iliad’s quad play ingredients. Bouygues has been something of a wallflower – its own bid for SFR was rejected in favour of Altice’s in 2014, and this year it snubbed an $11bn offer from Numericable-SFR. Also, reported merger or spectrum joint venture talks with Free came to nothing.

Now it may be in the sights of the market leader, which has also been forced to cut costs and jobs in the wake of the Free earthquake. Orange has been looking to bulk up its presence in key markets, from France to west and north Africa, while pulling back from those where it is unlikely to secure leadership, from the UK (where it is selling most of its stake in EE to BT) to east African countries like Kenya and Uganda.

The Bloomberg sources said Orange was also considering other options. The Bouygues deal under discussion would see the smaller group retaining its construction unit and keeping a minority stake in the combined media and telecom business.

One of the potential stumbling blocks, of course, may be antitrust and regulatory objections to a deal which would reduce the number of mobile operators in France to three again – this likely objection to the SFR-Bouygues merger proposed in 2014 was one factor which led SFR’s former owner, Vivendi, to choose the Altice bid. Regulators are still inclined to define mobile and broadband markets separately when considering competitive landscapes, even though increasingly, these two businesses are converged and the real competition is between quad play providers.

In Orange’s case, both considerations are valid of course, so the incumbent would probably have to make significant concessions to secure Bouygues, perhaps including divestment of spectrum or other assets. In the mobile market alone, the combined firm would serve 59% of mobile customers (excluding those on MVNO services), up from Orange’s current 40%. Those figures suggest that a probable regulatory condition would be greater openness to MVNOs, a stipulation which was imposed last year on mobile mergers in Germany and Ireland, both of which reduced the number of MNOs in a country.

Orange also has 33.3m fixed line customers, while Bouygues is the smallest fixed broadband player with 2.7m (Numericable-SFR and Iliad/Free have over 6m each).

Meanwhile, the two companies are remaining coy. Bouygues’ official statement was that it had “no plans to withdraw from the telecoms and television sectors and reaffirms its long term presence in these two industries”, while Orange simply refused to comment. However, shares in both firms rose on the speculation. Another hurdle may be the apparent reluctance of the Bouygues family, which controls a major portion of the shares still, to exit telecoms, as seen in its rejection of Numericable-SFR’s bid earlier this year.

Bouygues’ media business mainly consists of its 44% stake in Societe Television Francaise 1, France’s largest private TV group. It holds 90.5% of the telecoms arm, with advertising billboard operator JCDecaux Holding owning the rest.

Amid the Telecom Italia rumors last week, Orange said it was working with advisers to explore its options for expansion in Europe, though denied that the Italian incumbent was in the frame.

French regulator Arcep said this week that the four MNOs had invested a combined €2.2bn ($2.4bn) in 2G, 3G and 4G networks in 2014, but added that more needs to be done to bring mobile broadband to rural and sparsely populated regions. However, it said that 4G roll-out had been far faster than 2G or 3G had been. As of July 15, Orange covered 76% of the population with its 4G network, Bouygues covered 72%, Free 52% and Numericable-SFR 39% (though the last of these has greater coverage thanks to a deal to use Bouygues’ LTE network).

As of December 1, 22,703 mobile sites had been authorised for 4G in France – 8,202 for Orange, followed by Bouygues with 6,858, Free Mobile with 5,347, and Numericable-SFR with 3,802. The majority of sites are in the 2.6 GHz band (15,833 sites), followed by the 800 MHz band (13,610) and the 1.8 GHz band (8,158).

Operators must also have achieved full 2G coverage in all town centers by the end of 2016, and 3G coverage by mid-2017. “In particular, there are some 2,000 town centres that still need to be provided with 3G coverage from all four mobile operators by mid-2017,” Arcep said.

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