After more than a year of talks, French alternative operators Groupe Cegetel and Neuf Telecom have agreed to merge, creating the second largest carrier in France with annual revenues of more than $3 billion.

The merger, which brings together two of France Telecom SA's (NYSE: FTE) broadband rivals, should be completed by this August (see Neuf: Time Is Right for IPTV and Cegetel Picks Italtel for VOIP Over DSL).

Jacques Veyrat, current CEO of Neuf and due to be CEO of Neuf-Cegetel, told a press conference late Wednesday that the new operator's management team will work towards a listing on the Paris Bourse by the end of 2006 or early 2007.

"Neuf-Cegetel is the best possible mix against France Telecom," said Veyrat.

Combined, the two operators generated revenues of just more than €2.5 billion (US$3.2 billion) in 2004, though that's dwarfed by France Telecom's annual sales of more than €47 billion ($60 billion). (See France Telecom Reports 2004 Results and Neuf Reports 2004 Results.)

The new carrier expects to achieve 2005 revenues of €2.8 billion ($3.6 billion), and is aiming for revenues of €3.3 billion ($4.2 billion) in 2007, when it looks to achieve an EBITDA (earnings before interest, tax, depreciation, and amortization) margin of 20 percent, compared with 9 percent in 2004.

Although the deal has been presented as a merger, it looks more like an acquisition of Cegetel by Neuf, which will retain 72 percent ownership of the new carrier. As compensation for holding only a 28 percent stake, SFR, Cegetel's current majority owner, will get €380 million ($485 million) from Neuf.

Now the new carrier's management must see if it can create a profitable operator. Both Neuf and Cegetel are losing money -- they had a combined loss of about €125 million ($159 million) in 2004 -- and the French unions believe the merger could result in significant layoffs: as many as 1,200 of the combined 3,800 staff, though Veyrat denies there are any such plans.

Neuf-Cegetel faces tough competition as it strives to build its broadband customer base from 850,000 to a target of 2 million in 2007. Its chief rival is, naturally, France Telecom, which has more than 3 million retail DSL subscribers.

But there are other strong players. Free, the triple-play service provider owned by Iliad (Euronext: ILD), had more than 1 million customers at the end of 2004, and it's profitable (see Iliad Ups Profits in 2004).

Then there's Telecom Italia SpA (NYSE: TI), which recently strengthened its broadband share in France by acquiring Liberty Surf. It has since announced plans to invest heavily to build its market share (see Eurobites: Incumbents Splash Their Cash and Italians Prep Big French DSL Rollout).

But Neuf-Cegetel is not just a broadband player. It's second only to the incumbent in the wholesale market, with ISP customers such as AOL France, Club Internet (part of T-Online International AG), and Tele2 AB's (Nasdaq: TLTO) French unit.

The new operator will also be the only national traditional voice competitor to France Telecom, with 2.8 million residential customers and a 16 percent share of the business market.

Broadband, though, is the real battleground, with the market expected to remain highly competitive, due mainly to "the highly effective regulation of the market, which resulted in low-priced and widely available unbundled products," writes Heavy Reading Senior Analyst Graham Finnie in his recent report, Next-Generation Broadband in Europe: The Need for Speed.

— Alain Coffre, special to Light Reading