Competition from online giants could also drive takeover activity, according to Ed Barton, an analyst with the Ovum Ltd. market research firm. "I don't see it as a telco thing but more about consolidation between content and distribution to scale up and compete more effectively against Google, Netflix, Facebook and Amazon," he says. "Of course, there is no guarantee this will work."
As Barton points out, addressing the entirety of Europe, with its cultural diversity and multitude of languages, could be much tougher than operating in the US. But he does anticipate further consolidation. And while he has not looked closely at the possibility of a deal between Orange and Vivendi, he agrees it would "make sense in the context of what competitors are doing." For evidence of that, look to the £26 billion ($33.2 billion) bid for Sky by US cable giant Comcast Corp. (Nasdaq: CMCSA, CMCSK). (See Fox's Sky Offer Doesn't Trump Comcast's, but Could Extend Bidding War.)
With Netflix Inc. (Nasdaq: NFLX) and Amazon.com Inc. (Nasdaq: AMZN) hammering traditional TV companies, Comcast's move for Sky seems bound to have rattled European telcos as a further sign of US overseas ambitions. Even before Comcast's latest bid was announced, there was some concern that Europe's telecom markets, with their squad of subscale operators, might one day be vulnerable to a US- or Chinese-led assault. Regulatory opposition to "horizontal" mergers, between companies in the same sector, has stopped European operators from adding muscle in the form of telecom assets. But a largely "vertical" transaction, such as Orange buying Vivendi, should not encounter the same hostility. Comcast's Sky bid already proves European media assets have caught the attention of US operators. If Orange does not acquire Vivendi, a US company might, warns Pescatore, citing Verizon Communications Inc. (NYSE: VZ) as a potential buyer. (See Orange Rules Out M&A Moves in France, Returns to Growth.)
No Orange deal for Vivendi would be straightforward, though. With a market capitalization of about €28.3 billion ($32.2 billion), Vivendi has watched its share price rise about 13% in the last year. The market value of Orange, currently worth around €38.1 billion ($43.3 billion), has barely changed over that period. Beyond Canal Plus, it is unclear whether Vivendi's assets would hold much attraction for the French operator. Judging by Richard's earlier comments, Orange would not want Vivendi's music business. But its gaming assets, through Gameloft, could help Orange appeal to a younger audience, says Pescatore. Meanwhile, a 24% stake in Telecom Italia (TIM) would make Orange the Italian incumbent's biggest individual shareholder, although boardroom battles and political drama in Italy could dampen enthusiasm. (See Telecom Italia Names Genish CEO After Boardroom Battle and Telecom Italia Molders as Shareholders Feud.)
Nevertheless, no other big European operator looks in a position to countenance a move. Germany's Deutsche Telekom AG (NYSE: DT) is taking on extra debt to merge its T-Mobile US Inc. business with local rival Sprint Corp. (NYSE: S). Vodafone Group plc (NYSE: VOD) is similarly focused on a takeover of cable asserts owned by Liberty Global Inc. (Nasdaq: LBTY) in Germany and eastern Europe. Both Spain's Telefónica and France's Altice are trying to cut debt. BT Group plc (NYSE: BT; London: BTA) is slashing jobs and does not have interest in the residential market outside the UK. (See T-Mobile & Sprint: Marriage made in hell, Vodafone Pounces on Liberty Cable Assets in €18.4B Deal, Altice to Sell French, Portuguese Towers for €2.5B and BT: It's Good to Talk About Profits, but Not Customers.)
Orange's net debt is currently just twice its annual earnings (before interest, tax, depreciation and amortization), giving it a stronger balance sheet than most rivals, and its sales and profits are growing. That is testament to the company's investment in networks and service quality, and its avoidance of daredevil content moves, say supporters. But what has worked in the past will not guarantee success in the future. As convergence competition becomes rife, a bold M&A move could be just what investors seek.
— Iain Morris, International Editor, Light Reading