Bouygues could turn from predator to prey in French telecoms war
PARIS (Reuters) - French conglomerate Bouygues, having lost out in a takeover battle for Vivendi's telecoms business SFR, risks becoming prey rather than predator in a domestic mobile market with scope for more consolidation.
Losing SFR to rival Numericable is a setback for tycoon Martin Bouygues, who founded Bouygues Telecom in 1994, spending billions to turn it into number three in the French mobile phone market behind Orange and SFR.
Bouygues and Iliad, the number four mobile player, became unexpected allies during the fight for SFR. And now Iliad, with a market capitalization of around 10 billion euros, could try to swallow Bouygues, worth roughly 5 billion.
France's mobile landscape is being reshaped after Iliad's entry in 2012 sparked a price war. Iliad's Free Mobile service took a 12 percent market share and forced larger rivals Orange, SFR and Bouygues to slash costs.
Bouygues Telecom was already seen as a takeover target in a potential consolidation of the market, where competition has driven prices down by 20 percent in the past two years.
"It seems likely that one way or another Iliad and Bouygues will end up in each others' arms," Bernstein analyst Claudio Aspesi wrote in a note.
A marriage of France's third and fourth-placed mobile operators make sense on paper because of their size and fit. Iliad needs to build a mobile network, while Bouygues already has one. Iliad is second in fixed broadband while Bouygues is the smallest player there.
The Bouygues bid for SFR was widely seen by telecom bankers and analysts as an attempt to bolster Bouygues Telecom, which like its rivals has been hit by the price war. The deal would have created France's biggest carrier with 32 million customers.
Bouygues said it regretted Vivendi's choice of Numericable but would continue to play a central role in French telecoms. Iliad had no comment.
Bouygues Telecom was the hardest hit by Iliad's mobile push, and posted its first loss in over a decade in 2012. Bouygues Telecom's revenue fell 10 percent last year, and it contributed 31 percent of Bouygues core earnings, versus 41 percent in 2010.
Olivia Peters at RBC Capital Markets expects telecoms to drag group core earnings (EBITDA) down 10 percent this year.
With weakness in telecoms, Bouygues must show its construction business can drive growth this year, even though France, where the economy is weak, is a major market.
Bouygues' construction and road-building accounted for over two-thirds of group revenue and operating profit last year. Construction increased sales by 5 percent last year and growth is expected to remain strong this year.
"They seem to be winning lots of projects and large projects abroad, which if executed properly should be higher margin," Peters at RBC Capital Markets said.
Bouygues, founded in 1952, has expanded into an unlikely mixture of industries. It has often taken opportunities via privatizations because of French government ties, forged through years of bidding for public contracts.
Bouygues bought TF1, France's largest television broadcaster, at privatization in 1987. In 2006, it took over the government's stake in bailed-out train maker Alstom, in which it remains the biggest shareholder. It tried to enter the insurance market in 1982, as well as the food industry, and was in water distribution until 2005.
"It's perfectly conceivable that the group could re-invent itself once again," said Dominique Barjot, a historian at the Sorbonne University who has written a book on Bouygues.
If the group pulled out of telecoms, he said, it would be roughly back to where it was before Martin Bouygues ventured into telecoms in 1994, a year after the death of his father and company founder Francis Bouygues. "Martin Bouygues' daring adventure was clearly the mobile phone market," Barjot said.
JOBS AT STAKE
The tussle for SFR convinced government officials, regulators and telecom executives it would be feasible to cut France's mobile players back to three just four years after creating a fourth player by granting Iliad its mobile license.
The government openly backed the Bouygues bid for SFR over that of local cable company Numericable, on the basis this would calm "destructive competition" that has threatened jobs.
A government official told Reuters last week that efforts to promote an SFR-Bouygues deal aimed to stop the price war or a possible a hostile takeover from leading to job cuts.
"The thinking is that four operators is too many and there will inevitably be a casualty. So either you organize the move to three operators, or you remain passive but then you'll have to deal with mass layoffs," the person said.
To allay antitrust issues over its SFR bid, Bouygues had agreed to sell its mobile network and some spectrum to Iliad. Iliad, which is building its mobile network, jumped at the chance to scoop up 15,000 antennas.
Numericable's backer Patrick Drahi predicted more deal-making given that his competitors and the government had shown their hands in supporting mobile consolidation. Asked for his view on a potential Iliad-Bouygues tie-up, Drahi said: "Well if they do merge, it should not pose any problem!"
($1 = 0.7181 Euros)
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