SFR to Swallow Neuf in $6.4B Deal

Two of France's leading carriers, triple play service provider Neuf Cegetel Group (Euronext: NEUF) and mobile operator SFR , are set to create a quad play powerhouse that will become Orange (NYSE: FTE)'s greatest competitor.

Should SFR's €4.5 billion ($6.45 billion) bid to buy the near 60 percent chunk of Neuf it doesn't already own be successful, it would have 18 million mobile subscribers, more than 3.5 million broadband customers, and quarterly revenues of more than €3.1 billion ($4.44 billion), making it second only to the incumbent in each respect. (See Neuf Cegetel Reports Q3.)

Takeover talks were announced earlier this week, leading Neuf to suspend trading of its shares on Tuesday at €36.74. (See SFR, Neuf Talk M&A.)

Now SFR, which owns a 40.5 percent stake in Neuf, has agreed to buy the 29.5 percent stake held by the Louis Dreyfus Group for €34.50 per share. SFR will then offer to buy the remaining 30 percent (21.5 percent free float on the Paris exchange, 1 percent owned by Neuf employees, 7.5 percent owned by "Others") for €36.50 per share.

At those prices, buying the 59.5 percent of Neuf it doesn't currently own will cost SFR €4.5 billion.

News of the offer sent Neuf's share price down by €1.43, or 3.9 percent, to €35.31 once trading resumed Thursday morning.

To help fund the acquisition, SFR is to take a loan from its main shareholder, Vivendi , which owns 56 percent of SFR. Vivendi plans to raise between €1 billion and €2 billion ($1.43 billion and $2.87 billion) from its shareholders to fund the loan.

SFR's other shareholder, Vodafone Group plc (NYSE: VOD), which owns a 44 percent stake, had not returned calls as this article was published, but is believed to support the move, as it matches its strategy of marrying mobile and fixed assets. Vodafone is not set to provide financial support for the acquisition.

Should the takeover be completed -- which will likely take at least six months -- the combined carrier would have more than 18 million mobile customers (including 3.5 million 3G subscribers), and 3.5 million broadband users. Most of those broadband customers -- 3.12 million at the end of September -- come from Neuf, which has more than 600,000 users signed up for its IPTV service. (See IPTV Growth Gets Euro Pop.)

In addition, Neuf has already launched a fiber-to-the-home service and plans to invest €300 million ($430 million) building out a fiber access network. (See Neuf Launches 50-Mbit/s FTTx, Redback Beats AlcaLu to French Deal, and Neuf Makes Acquisitions Count.)

The remaining 443,000 broadband subs would come from SFR, which acquired Tele2 AB (Nasdaq: TLTO)'s French fixed line operations in July for €345 million ($494 million) to start its combined fixed and mobile service offer.

France Telecom, meanwhile, has more than 23 million mobile customers, more than 6 million DSL subscribers, and nearly 1 million IPTV users. (See table below.)

Table 1: How SFR/Neuf Cegetel Shapes Up Against France Telecom
Q3 revenues in France Q3 mobile revenues Q3 fixed revenues Mobile Subscribers Broadband Subscribers IPTV customers
France Telecom �7.06 billion �2.56 billion �4.5 billion 23.5 million 6.5 million 975,000
SFR plus Neuf Cegetel �3.16 billion* �2.3 billion �859 million* 18.1 million 3.5 million More than 600,000
* including Neuf's enterprise and wholesale revenues
Source: Company data for the three months ended September 30, 2007

Ovum Ltd. analyst Vincent Poulbere believes SFR's move makes sense, as the French fixed broadband market "is now generating much more growth than the mobile market."

Poulbere adds in a research note: "By taking control of Neuf Cegetel, SFR is in a position to develop synergies from being the number two operator on both the fixed market and the mobile market... It is also in a much better position to develop strategies around fixed-mobile convergence, from bundles of fixed and mobile services to more innovative products such as femtocells."

Now market attention will turn to the French market's No. 3 players -- Bouygues Telecom , with 8.9 million mobile customers, and Iliad (Euronext: ILD), which has nearly 2.8 million broadband customers. (See Bouygues Reports Q3 and Iliad Reports Q3.)

Speculation they might become swept up in France's telecom consolidation craze has lifted Iliad's share price by €0.97, more than 1.3 percent, to €73.20 today. It has risen nearly 3.2 percent this week.

But while Iliad is a dedicated broadband services player, Bouygues Telecom is just one part of a large, diversified industrial group that's involved in the construction, property development, and roadworks sectors. Its investors have less of an appetite for telecom M&A -- the Bouygues group's share price has dipped by 1.9 percent today to €57.15.

— Ray Le Maistre, International News Editor, Light Reading

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