PARIS Vivendi (VIV.PA) will enter three weeks of exclusive talks with cable group Numericable NUME.PA in an effort to finalize a deal to sell its telecom unit SFR for 11.75 billion euros ($16.4 billion) in cash, plus a stake in the resulting business.
The decision is a blow to conglomerate Bouygues (BOUY.PA), which had also bid for SFR.
"The board considers the Numericable offer to be the most pertinent for the group's shareholders and employees, and carries lower execution risk," Vivendi said on Friday.
Amid intense political lobbying - France's industry minister openly sided with Bouygues and criticized Numericable in a morning radio interview - Vivendi's board made the choice that was likely to help it exit a cut-throat telecoms market as quickly as possible.
The Bouygues bid was seen by Vivendi insiders as riskier because it would require a longer regulatory review and also time to carry out an initial public offering of the new company, sources said earlier.
Shares in Numericable were up 13 percent at 30.20 euros by 1331 GMT, while Bouygues' shares were down 8 percent at 28.82 euros. Vivendi was down 0.3 percent 19.80 euros.
For Numericable, which owns a cable network that covers two thirds of French households and sells television and broadband, winning SFR would vault it into the big league of French business.
It would also be a victory for billionaire entrepreneur Patrick Drahi, who founded the cable group two decades ago, against a later bid from Bouygues, in the face of the family-controlled firm's intense political lobbying.
French Industry Minister Arnaud Montebourg had backed Bouygues' bid because it would reduce the number of players in the French mobile market to three from four and calm what he called "destructive competition" that has sent prices down 20 percent in the past two years.
For Vivendi, a sale of SFR would cap a strategic overhaul that began in spring 2012, when veteran chairman Jean-Rene Fourtou declared there would be "no taboo" in re-examining the 160-year-old group's unwieldy holdings that ranged from video games to telecoms in Brazil.
Fourtou became convinced that Vivendi should exit telecoms, to focus more on its media businesses, after seeing the damage wrought by the mobile price war in France which was set off by the arrival of low-cost newcomer Iliad (ILD.PA) in 2012.
Once the group's cash cow, SFR began to drag down Vivendi's results and core operating profit halved from 2011 levels to 1.07 billion euros at the end of 2013.
To revamp Vivendi, Fourtou in July 2013 sold its majority stake in the profitable and growing video game business Activision Blizzard (ATVI.O) to pay down debt, and in November he sold its stake in Maroc Telecom (IAM.CS), raising about 10.4 billion euros in total.
The stage was set to split off SFR into a separate company by July, but that option looked less likely after Numericable and Bouygues swooped in with their takeover bids.
Bouygues, which is now third place in French mobile, wants to buy SFR to shore up its telecom business, which has been hit hard by the arrival of Iliad's Free Mobile service. It agreed to sell its mobile network and some spectrum to Iliad if it won the race for SFR in anticipation of potential objections from competition regulators.
Iliad's shares fell 5 percent as Bouygues' chances faded.
For Numericable, a tie-up with SFR would allow it to become a major player in mobile and grab a large network of stores and sales staff. The combined company would have almost 7 million broadband customers and 21 million mobile customers.
Bouygues has offered Vivendi 11.3 billion euros ($15.7 billion) in cash and a 43 percent stake in the combined entity, which would be spun off and listed on the stock market if regulatory approval was secured.
Numericable on March 5 bid 10.9 billion euros in cash and a 32 percent stake in the new company, and sources familiar with the matter said it later raised the cash portion of its bid by as much as 850 million euros.
FACTBOX - France's telecoms market- the players
Graphic - French telecom operators' valuation
Graphic - French Telecom operators' share price performance
($1 = 0.7180 euros)
(Additional reporting by Maya Nikolaeva and John Irish; Editing by Andrew Callus, Greg Mahlich and Mark Potter)