Bouygues Says 'Non' to Altice

Bouygues Group's directors have turned up their noses at a bid for Bouygues Telecom from cable company Altice, which had hoped to merge the company with its own Numericable-SFR business to create France's biggest mobile operator.

Altice was thought to have offered as much as 10 billion (US$11.2 billion) for Bouygues Telecom , more than twice the value analysts had put on the operator, but the directors of the French conglomerate believe it can thrive as a standalone business thanks to its 4G and fixed broadband capabilities. (See Altice Confirms Bid for Bouygues Telecom.)

In a statement, Bouygues expressed confidence that its telecom business could achieve an EBITDA margin of 25% by 2017, a level it has not seen since 2011.

The operator's EBITDA margin had fallen to less than 11% in the January-to-March quarter of this year.

Bouygues also noted that a transaction would face "significant execution risk" given the apparent opposition to a deal from French authorities, including Emmanuel Macron, the country's economy minister.

Because a merger between Numericable-SFR and Bouygues Telecom -- France's second- and third-biggest mobile operators respectively -- would leave France with just three mobile networks, politicians and regulators were concerned it would lessen competition and lead to an increase in service prices.

Another consideration for Bouygues was a forthcoming auction of 700MHz spectrum, scheduled to take place before the end of the year.

Arcep , France's telecom regulator, has clearly indicated it expects four companies to participate in the auction process and imposed caps on the amount of sub-1GHz spectrum any operator can hold at the conclusion of the process.

Should Numericable-SFR and Bouygues Telecom secure large quantities of 700MHz spectrum before executing a merger, the combined entity might exceed these limits. (See Altice's Bouygues Bid Creates 700MHz Confusion.)

Bouygues has also expressed concern about the impact consolidation would have on the employment situation in France, with Altice likely to announce job cuts in the wake of any deal.

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Having soared following news of an offer, Altice's share price had fallen by 6% on the Amsterdam Stock Exchange during Wednesday morning trading, while Bouygues' was trading 8% lower on the Euronext Paris.

Investors were hopeful that consolidation would restore profitability to an industry that has struggled ever since the entry into the mobile market of Iliad (Euronext: ILD) in early 2012.

Bouygues Telecom reported an operating loss of 62 million ($70 million) in the January-to-March quarter and registered a 2% year-on-year dip in sales, to 1.1 billion ($1.2 billion), because of falling prices.

Numericable-SFR, meanwhile, saw revenues drop by 4.6%, to 2.74 billion ($3.08 billion), over the same period, and has been slashing costs in order to boost profits.

Former state-owned monopoly Orange (NYSE: FTE) also blamed the impact of price-based competition for a 1.6% year-on-year fall in revenues in its domestic market for the first three months of the year. (See Orange Earnings Dip on Price Competition.)

Although Orange has previously expressed optimism that France's price war may be coming to an end -- having reported a year-on-year revenue decline of 4.4% in the first half of 2014 -- it has also said France would function better with three mobile operators than four. (See Eurobites: Orange Sees End to Price War.)

Its own share price had fallen by 3% on the Euronext Paris exchange during Wednesday morning trading.

Perhaps the only player happy with the status quo is relative new entrant Iliad, which has continued to flourish at its rivals' expense, reporting an 11.2% increase in revenues last year and a 6.6% rise in EBITDA. (See Iliad Plans Next Assault on French Rivals.)

Indeed, it is hard to see why Bouygues Telecom is so confident about its prospects as a standalone business given the pressure it is under from Iliad, which could even overtake it in the mobile market in the months ahead.

Iliad served 10.5 million mobile customers in March, up from just 10.1 million last year and about 8 million in 2013, while Bouygues Telecom's mobile customer base has grown from 11.1 million to just 11.3 million over the same period.

In its defense, Bouygues Telecom occupies a much stronger spectrum position than Iliad. Moreover, its 4G network is available to 71% of French consumers, while Iliad's reaches just 40%.

French Operators' Spectrum Holdings (MHz)
Source: European Communications Office
Source: European Communications Office

And while Iliad may have thrived in the last few months, its investors appear as concerned as others that Bouygues has rejected Altice's bid -- the operator's share price had fallen by 6% on the Euronext Paris exchange in Wednesday morning trading.

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

Kruz 6/25/2015 | 8:01:40 AM
Re: Political meddling and failure of fiduciary duty With an increasing offer every year(7.5 Billions last year, then 9 and now 11), Martin might well sell his wife soon :)
James_B_Crawshaw 6/25/2015 | 7:54:31 AM
Re: Political meddling and failure of fiduciary duty The financing of the deal is for Altice and Numericable-SFR shareholders to worry about. Bouygues shareholders are unlikely to ever see EUR10bn of value from the telecom subsidiary via dividend payments. M. Bouygues sees the telecom division as his wife apparently. Does Warren Buffet think about his investments in the same way?
Kruz 6/25/2015 | 7:35:01 AM
Re: Political meddling and failure of fiduciary duty It seems that Bouguyes was  mainly concerned how Altice would finance the takeover deal as Altice is already in debt and was going to also finance the deal with debt money.
James_B_Crawshaw 6/24/2015 | 1:16:24 PM
Political meddling and failure of fiduciary duty The things that grate me about this situation are:

a) last year the French government was egging Bouygues on to buy SFR and return to a 3 player mobile market which was supposed to be less cut throat and hence better for investment and jobs. Now the finance minister is saying no to a SFR-Numericable takeover of Bouygues Telecom because this would be bad for investment and jobs. Make up your minds!

b) I can understand why the 4 employee representatives on Bouygues' board have rejected the approach because yes it would mean job cuts. And I can understand why the CEO and co-CEO (both of which happen to share the surname Bouygues) have voted to keep this anachronistic construction-telecom conglomerate intact (empire preservation, loss of face etc). But why would the supposeldy independent directors (who have only had 24 hours to consider the matter) vote to not pursue the offer? The unanmity of the board is deeply suspicious to me. 
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