Business Transformation

End of the Bouygues Affair for Orange

Orange's ambitious plan for a €10 billion (US$11.4 billion) takeover of French rival Bouygues Telecom had initially seemed like a long shot, and yet the growing optimism of CEO Stéphane Richard, and a lack of outright political opposition, had made a deal look increasingly possible.

With the two companies ultimately failing to reach an agreement, investors may be questioning Richard's leadership and asking where Orange goes from here. (See Eurobites: Orange, Bouygues End M&A Talks.)

Doubts about the outlook in a four-player French market were reflected in a sharp fall in share prices on Monday morning. Orange (NYSE: FTE) was trading down 4.7% in Paris as this story was published, while that of Bouygues, the industrial group that owns Bouygues Telecom , had fallen by 15.2%. Indeed, if there is a consolation for Richard, it is that his competitors are faring much worse in the financial markets. Number-two player Numericable-SFR had lost 16.6% of its value, while Iliad (Euronext: ILD), the enfant terrible of French telecom, had suffered a 15.9% drop.

Orange CFO Ramon Fernandez has already taken to Twitter to shore up confidence in Orange's ability to thrive without Bouygues, noting Orange's "incomparable momentum." But investors had clearly been hoping that a reduction in competition would relieve the pricing pressure that has been squeezing French operators ever since Iliad entered the mobile market in early 2012. Last year, Orange's French revenues fell by 0.8%, to €19.1 billion ($21.7 billion), although the French incumbent flagged an improvement over the course of the year. (See Orange CEO Sees 50:50 Chance of Bouygues Deal.)

Going back to business as usual should mean focusing even more keenly on the Essentials2020 plan that Orange unveiled in March last year. Under this scheme, Orange has said it will spend about €15 billion ($17.1 billion) over the 2015-18 period on the rollout of high-speed fixed and mobile networks (Orange spent about €6.5 billion, or $7.4 billion, in overall capital expenditure last year). But these eye-watering investments, which equaled about 16% of Group revenues in 2015, may have a limited business impact while Bouygues remains a free agent. (See Eurobites: Orange Plans €15B Networks Upgrade.)

Quite possibly, the fallout from Bouygues will compel Orange to concentrate on growth opportunities elsewhere while taking a heftier axe to costs at home (or at least trying to). Outside France, Orange continues to prosper in a number of African and Middle Eastern markets and has recently been expanding its empire in west and central Africa. These countries now appear even more critical to Orange's revenue-growth ambitions. In France and Europe, meanwhile, it is looking at becoming a fully fledged bank in a move that could open up new sales opportunities in the years ahead. (See Orange Strikes $160M Deal for Tigo DRC, Orange Buys Airtel Ops in Burkina Faso, Sierra Leone, Orange Expands in Africa With Cellcom Liberia Acquisition, Orange Aims for 20% Sales Growth in Africa, Orange Claims Customer Interest in Bank Move and Orange May Become Bank With Groupama Takeover.)

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The end of the Bouygues affair might also spur Orange to move faster on network and IT transformation. Like other service providers, the former state-owned monopoly is investing in software and virtualization technologies to meet new demands. It has recently played down the cost-saving attractions of SDN and NFV but highlighted their importance to service innovation. Speaking at the recent MPLS/SDN/NFV World Congress in Paris, Francois Bertret, Orange's SDN/NFV transformation program director, said that SDN and NFV would in future allow business customers to manage their own connectivity, security and quality-of-service policies. According to Yves Bellego, Orange's director of technical strategy, Orange is also developing use cases to explore the service-related benefits of virtualization. One involves a virtualized content delivery network that Orange could deploy as and when needed during times of high demand. (See DT: We Need SDN, NFV to Battle Web Giants and Orange Sours on Cost Benefits of NFV.)

Judging by today's share price movements, investors still feel Orange is in a much stronger position than its traditional rivals in a French market that seems destined to remain a four-player set-up for the foreseeable future. Recent innovations, including a more sophisticated version of its Livebox home gateway, show the incumbent can stand up to the best of its network competitors. But it has yet to answer other kinds of threat. A Bouygues takeover might have fortified Orange in the face of competition from web-scale players, staving off some awkward questions about its long-term prospects. Its failure should force Orange to think about tackling those challenges with greater urgency. (See Orange Launches Livebox at Louvre With Luc.)

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

COMMENTS Add Comment
[email protected] 4/4/2016 | 8:51:24 AM
Bouygues has said it can go it alone but... I wonder if Bouygues has the resources and will to be a long-term player? It has said it can go it alone, but....  what is it going to do now? Will Iliad pounce with a low-ball offer?
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