Orange CEO Sees 50:50 Chance of Bouygues Deal
Orange CEO Stéphane Richard has told investors the chance of acquiring Bouygues Telecom has improved to "50:50" but expressed concern about the complexity of the deal and the need to reach agreement with other stakeholders in the French telecom market.
The French incumbent revealed it was in talks to acquire Bouygues Telecom , France's third-biggest operator, in January, with local press reports suggesting it could pay €2 billion (US$2.2 billion) in cash and €8 billion ($8.9 billion) in shares for the smaller business. (See Eurobites: Orange Confirms Bouygues Talks and Orange Gets Serious About $10.9B Bouygues Takeover – Report.)
A transaction would leave France with just three big network operators and is likely to have stoked concern among national and European competition authorities.
Speaking during Orange (NYSE: FTE)'s fourth-quarter earnings call, Richard said the probability of acquiring Bouygues had improved from about 10% originally and that discussions were progressing with "good momentum."
Answering questions from analysts, Richard denied the merger was about "market repair," arguing that it would instead help Orange to "optimize" its capital expenditure on the rollout of fiber and 4G networks.
"We think the French market, given the size of the country, will be more efficient for everyone based on three strong players instead of four players, some of which will have difficulty becoming clearly convergent players in the mid-term," he said. "The purpose is not to have market repair."
Given opposition to merger activity from some French politicians, Orange is clearly eager to downplay any likelihood that consolidation could lead to an increase in prices in the French market.
Richard said any deal would need to meet three criteria: delivering value for shareholders; addressing the concern about job losses among Bouygues employees; and minimizing "execution risk."
"In terms of the cash-versus-equity aspect of the deal, we have not made any kind of decision regarding this aspect," said Richard when asked whether an all-cash deal would be preferable.
Questioned about the prospects for merger activity involving Europe's very biggest service providers, Richard gave a downbeat assessment of conditions, arguing there had to be an improvement in the regulatory environment and more progress on the rollout of all-IP networks before such deals could happen.
"To be honest, I don't think those elements -- the technology and the prospect of a new framework -- are near enough and strong enough to justify big moves between the big European players, as I've said previously," he said. "I don't think the time has come to see big pan-European combinations."
Like other European incumbents, Orange is substituting all-IP technologies for older, PSTN-based systems, but it does not expect to have completed the all-IP transition across its network footprint until 2020. (See DT Completes All-IP Move in Croatia.)
However, the all-IP investments should allow the operator to shut down many of its country-specific technologies, replacing those with platforms that can support services across a number of geographical markets.
Financial analysts have argued the all-IP move could provide a rationale for takeover activity, allowing an operator to boost sales and margins by acquiring other networks and then dispensing with employees and systems it would previously have needed.
Richard's comments came as Orange claimed to have beaten its target of stabilizing core profits one year ahead of schedule.
The operator's EBITDA rose by 0.1% in 2015, to €12.4 billion ($13.9 billion), while revenues fell by just 0.1%, to €40.2 billion ($44.9 billion) -- a big improvement on the sales decline of 2.5% that Orange witnessed in 2014.
CFO Ramon Fernandez told analysts the performance was testament to Orange's investment activity, with capital expenditure rising by 9.3% in 2015, to around €6.5 billion ($7.3 billion).
"It's clear this commercial performance is supported by an increase in investments and that effort is mainly focused on France, which accounts for more than half of the increase," he said.
Orange has been spending heavily on the rollout of fiber and 4G networks in the face of mounting competition from Numericable-SFR , Bouygues and Iliad (Euronext: ILD), whose entry into the mobile phone market in early 2012 is widely blamed for triggering a price war.
Richard expects to invest nearly €7 billion ($7.8 billion) in capital expenditure this year and is aiming for further growth in EBITDA.
"2015 has been a year of turnaround and 2016 will be a year of consolidation," he said.
Sales in 2015 were boosted by a strong performance in Africa and the Middle East, where revenues were up by more than 5%, helping to offset declines in major European markets.
Orange is aiming for annual growth of 5% in Africa and the Middle East over the 2014-18 period and has recently acquired a number of assets in west and central African markets. (See Orange Strikes $160M Deal for Tigo DRC, Orange Buys Airtel Ops in Burkina Faso, Sierra Leone and Orange Expands in Africa With Cellcom Liberia Acquisition and Orange Aims for 20% Sales Growth in Africa.)
Orange's share price was trading about 0.25% higher in Paris just before noon today.
— Iain Morris, , News Editor, Light Reading