Orange/Bouygues is latest French merger report May 16 2014

In wake of Bouygues's loss of SFR to Numericable, third cellco will seek other partners, while the cableco will also buy Virgin Mobile

By Caroline Gabriel

Last week France's second and third cellcos, SFR and Bouygues, were supposed to be exploring a merger and/or a bid for MVNO Virgin Mobile. Just a week later, the wheel has turned again in the tumultuous French mobile market. This time, Numericable - the Altice-controlled cable operator which is buying SFR - is after Virgin, while Orange could even join the firms circling around Bouygues.

The government, having insisted on creating a fourth network operator when it awarded spectrum to Iliad's Free Mobile, now seems to favor reducing the number back to three carriers, having seen the price war sparked by Free's disruptive pricing and cable/WiFI bundling, and the wave of job cuts forced upon the incumbent three.

However the M&A merry-go-round goes, the once-somnolent French market will have changed forever, setting new pricing assumption and consumer expectations. But as in other European markets, there is a rising sentiment that three network owners is enough, given saturating user bases, falling tariffs and proliferation of MVNOs.

Economy minister Arnaud Montebourg has led the government volte-face, calling for at least two carriers to merge - though ironically, one of the reasons SFR parent Vivendi chose Altice over a rival bid from Bouygues was that it believed the antitrust regulators would be harder on a deal that reduced the number of cellcos. He told the French National Assembly recently: "We will get there, to having three operators that are able to invest and that will stop destroying jobs and killing each other."

Bouygues's CFO Philippe Marien said on the company's earnings call this week: "All scenarios are on the table. All market operators are looking at hypotheses, opportunities, work sharing, partnerships and commercial exchanges." Meanwhile, French newspaper Les Echos reported that the CEOs of Orange and Bouygues, Stephane Richard and Martin Bouygues, had discussed possible merger on "several" occasions.

The CFE-CGC trades unions recently petitioned the prime minister, Manuel Valle, to favour a merger of these two firms, in order to save jobs. They warn that between 1,500 and 2,000 jobs will be cut from Bouygues's 9,000-strong workforce as a direct result of the failure to acquire SFR.

Orange has a market value of €32.5bn ($45bn), and the French state owns 27%, while Bouygues's mobile unit would be worth an estimated €5bn. Officially, both companies are saying they are exploring their options, but are not identifying potential partners, but market speculation is currently focusing heavily on them as a couple. "We're evaluating our options, but nobody from the side of the government has asked me to study the purchase of Bouygues Telecom," Richard said in the Les Echos report.

But despite the new enthusiasm of the authorities for consolidation, any deal involving Orange would be far more closely scrutinized than other combinations, at national and EU level. A combination of Orange and Bouygues would control about 50% of mobile users in the country.

Meanwhile, Numericable says it is in exclusive talks to acquire Virgin Mobile France from owners including the UK's Carphone Warehouse Group for €325m including debt. Virgin Mobile is France's largest MVNO and was previously linked with talks with both Bouygues and SFR, and other candidates. If Numericable becomes the owner of both SFR and Virgin, it will add a substantial mobile user base, boost its ability to offer quad play bundles, and achieve economies of scale. It is likely to migrate Virgin's network leasing deal with Orange to SFR. Virgin Group currently owns 54% of the company and would likely keep a stake.