(Adds finance minister comments)
By Leila Abboud and Gwénaëlle Barzic
PARIS, March 9 France's Bouygues Telecom has agreed to sell its mobile network and much of its spectrum to smaller rival Iliad as a way to head off competition regulators' concerns about its pending bid for Vivendi's SFR.
If Vivendi picks Bouygues' bid for SFR over a rival offer - and if regulators approve the merger - then Bouygues will sell 15,000 mobile antennas and some of its mobile spectrum to Iliad for up to 1.8 billion euros ($2.5 billion), according to statements from both companies on Sunday.
France's telecom landscape is on the verge of a major reshaping after Iliad's entry to the mobile arena in 2012 sparked a fierce price war. Iliad's Free Mobile service grabbed nearly 10 percent market share and forced its larger rivals Orange, SFR, and Bouygues to slash costs to cope.
The fallout convinced Vivendi to exit telecoms after seeing core operating profit at SFR, France's second-biggest operator, halve from 2011 levels to 1.07 billion euros last year.
It had been planning to spin off SFR this summer, but is now weighing two competing bids from Bouygues and local cable operator Numericable. Bouygues has offered Vivendi 10.5 billion euros in cash and a 46 percent stake in the new company, while Numericable offered 11 billion euros and a 32 percent stake in the new company.
Combining Bouygues, the third-biggest telecom group in France, with SFR would give the new carrier 42.8 percent market share, more than current leader Orange. Competition lawyers have said the Bouygues-SFR tie-up would attract tough regulatory scrutiny because of the risk the new company would be too dominant, leading to higher consumer prices.
Numericable faces fewer competition issues because it is not a major player in mobile, although there would be some issues on media and content rights.
Bouygues knew the main weakness of its bid versus that of Numericable's was that it has a greater risk of being blocked over competition concerns, according to a person familiar with the company's thinking. The deal with Iliad is meant as a pre-emptive strike to get Vivendi's board to pick its bid, the person said.
"This agreement allows us to present to the (French) antitrust authorities a merger proposal that ensures strong competition on the French mobile market," Bouygues Chief Executive Martin Bouygues said.
French Finance Minister Pierre Moscovici told BFM TV that the final verdict would be left to antitrust regulators but that the government was for now focusing on three aspects to each bid: the impact on investment, on employment and on consumers.
In an earlier interview with French newspaper Le Parisien, French Industry Minister Arnaud Montebourg was more strident, saying the government's view was that the "destructive" telecoms price war would end if France's four mobile operators went down to three, implying Bouygues' bid was potentially preferable.
"(The government's) red line is clear: no layoffs plan, no voluntary departure plan and no job cuts," Montebourg was quoted as saying. "Competition by destruction will end if we go back to three operators while keeping prices low. It will not end if Numericable wins SFR."
Iliad has been building its own mobile network for the past three years and has put up 3,000 antennas to cover part of the country. While it builds, Iliad has been paying Orange 500 to 600 million euros a year to carry its mobile traffic and permit it to operate.
The agreement with Bouygues would give Iliad a fully functioning network sometime in 2015 and save it money by allowing it to end the contract with Orange in 2016, according to the paper.
Thomas Reynaud, Iliad's chief financial officer, said the group would finance the purchase of the towers and spectrum from its cash reserves and existing lines of credit, and that no capital increase would be needed.
Iliad's strategy of being the low-cost operator that disrupts the market will not change "one iota", he said.
"The deal gives us all the resources we need to continue our strong commercial performance and our development," he added.
A Vivendi spokesman said on Sunday that the group's board would continue to study the possible scenarios for SFR and had no preference at this time. A small committee of board members met on Saturday to review the bids, and a full board meeting is planned for late this week, sources earlier said.
A spokesman for Numericable declined to comment.
($1 = 0.7214 Euros) (Reporting by Leila Abboud and Gwenaelle Barzic; Editing by Lionel Laurent and Alistair Lyon)