French telcos are having another go at their M&A jigsaw, two years after a collapsed deal between Orange and smaller operator Bouygues. This time, Bouygues is eyeing Altice’s French unit, Bloomberg reports. Regulatory support is still the missing piece.
It’s only a slight simplification to say the French market is a battle between three billionaires and the government. State-backed Orange, Martin Bouygues’ eponymous conglomerate, Patrick Drahi’s Altice unit SFR and Xavier Niel’s Iliad have been locked in a price war since Niel’s group launched in 2012. Average monthly revenue per mobile user was 21 euros last year, according to Bernstein estimates, from almost 44 euros five years earlier.
The prospect of price hikes, or at least less-steep declines, gives operators reason to merge beyond typical deal savings like slashing jobs and sharing costs. Bouygues would find it easier to strike an agreement with Drahi than Orange, since the government’s 23 percent stake in the incumbent complicates negotiations. And after heavily-indebted Altice’s 60 percent share-price fall in a year, Bouygues could push for a good price. On an industry-typical multiple of six times EBITDA, Altice France would cost 25 billion euros including debt. That’s large given Bouygues’ market capitalisation of 15 billion euros, but the telco is talking to partners like CVC Capital Partners, Bloomberg says. Altice and Bouygues denied the reports.
The problem is regulation. European Commission antitrust officials have a tacit rule that consumers are better served by four rather than three operators. It blocked a deal between O2 and Three in Britain on those grounds, and invited Iliad into Italy as a condition of CK Hutchison and VEON’s 2016 merger. Telecom-service price rises have accordingly lagged the consumer price index in the European Economic Area for over a decade, adding weight to the commission’s aggressive stance.
The counterargument is that price wars undermine telcos’ investment, harming the quality of mobile and broadband networks. If that’s true, Altice would be a test case, since its high interest costs alongside France’s low prices leave may leave less room for capital spending. Still, that argument is hard to square with Altice’s rapid build of fibre broadband in recent years. Regulators and dealmakers may have too little in common for a deal to happen.