Vivendi clings to telecom. Bouygues or Numericable potential partners

Vivendi: Mkt Cap €27.21bn (as of 07/03/14)
Bouygues SA: Mkt Cap €9.61bn (as of 07/03/14)
Numericable: Mkt Cap €3.52bn (as of 07/03/14)

In November 2013, French media and telecom conglomerate Vivendi announced plans to spin off its mobile telephone division, SFR, in an effort to refocus its operations in the media sector and remove the conglomerate discount that weighed down on the company’s stock price. This week Vivendi’s plans for SFR took center stage as the French company reported the receipt of two bids for its telecom company: one from Bouygues Telecom, France’s number 3 mobile operator, the other from Numericable, the leading cable television and internet access provider in metropolitan France.

The European telecom market, one of the continent’s most competitive and least attractive sectors, has been experiencing a trend of company consolidations. Companies have been pushing for mergers in the main markets, claiming that intense mobile-operator competition and falling prices have eroded profit margins. As a result, the European telecom sector has become rife with deal making. Announced deals amounted to $194bn in the 12 months leading to March 6th, which is a fourfold year-on-year increase. The mentioned figure is somewhat skewed, however, due to the magnitude of last year’s $130bn Vodafone-Verizon deal.

Bouygues Telecom, currently France’s 3rd telecom operator in terms of subscribers, has submitted a €14.5bn offer, 10.5bn of which will be financed in cash with the remaining value being generated by a 46% stake in the merged company. Bouygues further stated that it intends to pursue an IPO of the resulting company, retaining a 49% stake and allowing Vivendi to dispose of up to 15% of its stake. The largest singe obstacle for the deal comes in the fact that the Bouygues-SFR tie-up would create the largest mobile operator in France and the 7th largest in Europe, thus raising significant anti-trust concerns at both the French and EU regulatory levels. In order to address anti-trust challenges, Bouygues has pointed out that the proposed acquisition would create synergies valued at €1.4bn annually, 75% of which would be attained through cuts in operating costs by optimizing the resulting company’s infrastructure, rather than job redundancies. Bouygues thus seeks to address one of the most ardent requests of the French government, namely job creation. Furthermore, Bouygues is considering disposing of part of the resulting company’s assets and the return part of the resulting spectrum to market competitors in order to sway national and European market regulators that the deal would not create a duopoly for the French telecom market.

The competition for Bouygues Telecom comes from French cable company Numericable, which has advanced a similar acquisition bid for SFR valued at €15bn, with annual synergies estimated at €1.2bn originating from savings in fiber investments and better quad-play product services. Numericable would provide €11bn in cash, €3bn in assets and the remainder would be financed through capital raising. JP Morgan has agreed to provide €8bn in financing. Vivendi would retain 32% in the remaining company, all of which could be sold immediately after the merger is completed. In comparison to Bouygues’s offer, Numericable seems to be advantaged by the fact that the tie-up would not shake up the national telecom market. A merger with the cable operator rather than a direct telecoms competitor is unlikely to come under serious regulatory scrutiny as it would maintain the status quo of four mobile phone providers in France.

Bouygues Telecom retained HSBC and Rothschild as advisers, Morgan Stanley and JP Morgan advised Numericable, while SFR hired BNP Paribas and Goldman Sachs.

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