In an attempt to alleviate regulatory concerns over a potential Bouygues Telecom-SFR merger, France’s third-largest operator has agreed to sell its network to Free Mobile.
The transaction, worth up to €1.8bn (US$2.5bn), will only go through if…
In an attempt to alleviate regulatory concerns over a potential Bouygues Telecom–SFR merger, France’s third-largest operator has agreed to sell its network to Free Mobile.
The transaction, worth up to €1.8bn (US$2.5bn), will only go through if Bouygues Telecom is successful in its bid for larger rival SFR and if necessary approvals are obtained, Free parent Iliad said in a statement at the weekend.
Currently in a bidding war with local cableco Numericable for SFR, the network deal shows telecoms and industrial conglomerate Bouygues’ determination to win the deal.
The agreement to sell its network to much smaller challenger Free is expected to be welcomed by regulators, who will likely consider it an important step to limit anticompetitive effects of a horizontal merger of the two mobile operators.
Last week, Bouygues offered Vivendi €10.5bn for SFR and 46% of the merged entity post-deal. This is higher than the bid from Numericable owner Altice, which is understood to have offered €11bn and a 32% stake in a combined company.
However, there are concerns that a Bouygues-SFR deal could fail on regulatory hurdles, as it would shrink the French mobile market from four to three operators.
In the past, the French competition authority had strongly opposed the idea of consolidation. But Bruno Lasserre, the watchdog’s chairman, said a few days ago that “there are no magic number for an ideal market”, indicating a potential change of mind.
In the face of an intense price war since the arrival of Free in 2012, the three established operators including incumbent Orange have been losing market shares steadily, with French authorities fearing fierce competition among them might lead to job cuts in the future.
Industry renewal minister Arnaud Montebourg recently expressed his preference for horizontal consolidation as opposed to a convergence deal with cableco Numericable, saying in an interview with Le Parisien that a market would be stronger with three operators.
Despite the probability of losing its leading position in the mobile market, Orange, which is partly state-owned, would also prefer SFR being bought by Bouygues rather than by Numericable because it could ease the current price competition.
Conversely, TelecomFinance understands that the incumbent fears a converged entity combining SFR and Numericable assets would directly compete with its operations but would be subject to less stringent regulations.
Although most indicators currently seem to point towards a Bouygues-SFR deal, the stumbling block from a regulatory perspective might well be rates for consumers post-transaction.
While all four mobile operators have pledged not to increase prices in case of consolidation, eyes are turning to Austria where rates jumped up to 18% after the four-to-three merger of Orange Austria and Three in 2012.
One way Bouygues could further alleviate concerns from antitrust authorities would be to increase competition by granting MVNOs greater access to SFR’s network following a takeover.
Altice has not publicly commented on the new developments, but observers expect it to raise its bid to avoid being left out.
Ultimately, Vivendi could also still decide to reject both offers and go down the IPO path instead, as previously announced.
Free, the other winner
Market disruptor Free would greatly benefit from a Bouygues-SFR deal by securing Bouygues’ network, which reportedly includes 15,000 towers, as well as its 2G, 3G and 4G frequencies.
“In a potential market configuration back to three players, this operation would enable Free Mobile to speed up its ambitious commercial dynamics…in a context where infrastructure competitiveness reigns,” the company said in a statement yesterday.
And a deal with Bouygues would allow Free to gain further autonomy from Orange. It would no longer need to pay the estimated €600m to the incumbent under their roaming agreement.
In terms of market share, Free, which has been cutting prices ever since it started operating in January 2012, would still lag behind Bouygues-SFR (about 43%) and Orange (36%). But control over Bouygues’ network would allow it to better compete with its two remaining rivals in the long term.
Free owner Iliad will finance the deal using the group’s own and bank resources, without resorting to a capital increase.
Following the news, Iliad shares rose 13% this morning. At the same time, it published its financial results, revealing a 2.8 million increase in the number of mobile subscribers in 2013 to about 8 million.
Its revenues reached €3.7bn, a 19% increase on 2012.
