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Post written by:

Yves Gassot

Former CEO

...in search of a convergent outcome

Proceeding behind closed doors, negotiations between Orange and Bouygues are now at the point where each party – independent of any actual transaction – is anticipating the reasons for and possible pitfalls of such a complex and far from certain merger.

The four players in the French telecommunications market have a shared interest in a scenario that would see the disappearance of one of its operators, not least with a view toward ending the price wars that have ravaged the sector. The French market would join the three-operator configuration that currently exists in Germany and, in the months to come, will emerge in the United Kingdom and Italy as well. This is a singular deal, however, as it involves the top provider of fixed line, mobile and enterprise services. So it can only go through if the new Orange is prepared to jettison many of the assets that it would acquire in the process.

Let us try to imagine what could lie ahead for these players in a situation that would be rich study for any expert of game theory.

Competition authorities – and regulators to a lesser extent – are in a delicate position since, even though they did not instigate it, they cannot fail to see the appeal of a deal that would help the sector get back on its feet: a sector whose revenue has been shrinking since 2008 and on whose massive investments the country is relying to some degree to achieve its digital transition. But the deal must not be approved at the cost of undermining effective competition between operators. Unlike with other mergers and acquisitions we have seen in Europe – between third-ranked or and fourth- and second-ranked operators which, in order to gain approval, have had to agree to certain remedies (such as selling off frequencies and opening their networks to MVNOs) – authorities here will have to prop up and justify a largely revamped structure for France’s telecom services market, through the conditions they impose on the distribution of frequencies, infrastructure, subscribers, stores, staff, etc. One can foresee the risks associated with ‘managed competition’.

Bouygues faces the prospect of trading control of its business for cash and a substantial stake in the leading provider, on the basis of favourable valuation. It is essential that it obtain a premium price. The biggest danger for the company lies in not getting that price and, in so doing, of having employees and even customers lose some confidence in the operator’s future.

Orange cannot agree to shoulder all of the risks of such a deal without having an objective other than doing the heavy lifting of a consolidation that is in everybody’s interest, except the shareholders’. If the new group is required to divest itself of the majority of Bouygues Telecom assets, it will need to ensure that the buyers help shoulder the burden of that premium price granted to Bouygues. A certain degree of competition is therefore necessary for that to happen. The company also needs to anticipate what advantages it will lose in yielding assets to competitors, for example those presently helping Orange and Bouygues Telecom enjoy a lead in the 4G market. Lastly, the cash released at the end of the deal must enable Orange either to accelerate its investments in France and other markets to strengthen its positions (while bracing itself for the kickback from regulators!) or give it the means to lead the charge in consolidating the sector in Europe.

SFR and Iliad are certainly interested in building their businesses thanks to the acquisition of assets. Their teams and their bankers must nevertheless determine the maximum they can pay, with an eye on debt ratios, beyond which it would be more cost effective to put their money into marketing and sales to gain subscribers, or to step up their investments in equipment and frequencies to accelerate their superfast fixed and mobile network rollouts. In the process, they also need to avoid finding themselves in competition with one another or with third parties.

And let us not forget one final protagonist: the Government, not as an authority in charge of competition or the sector’s regulator, but in its role of major Orange shareholder: does it have objectives other than those of a careful investor? Is the goal to set up a core of controlling shareholders in order to allow the State to withdraw?