Vive la consolidation!

French telco M&A could be triumph of the smallest

France has so far missed out on the frenzy of mobile phone consolidation happening elsewhere in Europe. The latest mooted tie-up between France's largest mobile operator Orange and Bouygues may bring it up to speed, though tough remedies could make maverick No 4 player Iliad the likely winner.

One of the bigger obstacles to consolidation so far has been Martin Bouygues himself. The telecom unit of his Bouygues conglomerate, where he is chairman, is his brainchild. To be fair, he tried to buy No 2 operator SFR in 2014, but was beaten by Numericable, part of highly leveraged acquisition machine Altice. Since then he has remained aloof. Bouygues held talks on a sale with Orange and Iliad in 2014, and more recently rebuffed an offer from Numericable-SFR.

This time looks different. Bouygues is in early talks with Orange that would see the latter retain a minority stake in the combined business, Bloomberg reported in early December. Bouygues said it has no plans to withdraw from telecom and television sectors, which implies it may be amenable to accept payment in Orange shares. The rationale, on paper, also looks strong. Assuming the pair can save eight per cent of the combined cost base, synergies would be worth euro 3.9 billion, say analysts at Barclays, though potential remedies could detract from the benefits. The French state, which owns 25 per cent of Orange, seems agnostic.

The key uncertainty is regulatory, since the deal would combine the biggest and third-biggest operators. They would have roughly half of the mobile and fixed market. The European Commission would scrutinise a deal of this size if each of the companies has less than two-thirds of its European Union turnover in France. Orange has around 70 per cent of its EU revenue in France, including its enterprise IT solutions business, estimate analysts at Jefferies. Excluding enterprise, the proportion falls to 66 per cent, using RBC estimates. This matters because Brussels has taken a tough stance on mobile mergers.

That might benefit Iliad and to a lesser extent, SFR. As the smallest player, Iliad might get to buy more spectrum and part of Bouygues' mobile network on the cheap in a side deal. That would bring in cash for Orange but could make the deal less attractive. Negotiations look complex, but that's unlikely to stop the trio from finally hammering out a transaction in 2016.