LONDON/PARIS (Reuters) - French telecoms firm Orange has hired investment banks Lazard and Credit Suisse to assess a potential purchase of rival Bouygues Telecom, a deal that could top 6 billion euros ($8.2 billion), two people close to the situation said.
Market leader Orange has not yet made a firm decision to go ahead with a bid for No.3 operator Bouygues Telecom and discussions that began roughly six weeks ago could still end without a deal, said one of the people.
Orange was encouraged by preliminary talks with Europe’s antitrust watchdog last month that a deal would be possible with acceptable conditions, said a third person briefed on the situation but not directly involved.
However, Orange plans to wait for the watchdog’s ruling on Spanish telecoms firm Telefonica’s acquisition of KPN’s E-Plus in Germany, to have a clearer picture of what it might have to do to ease regulators’ concerns about a reduction in competition. The ruling is expected by July 10.
Bouygues, which is being advised by Rothschild, has become a takeover target after it was beaten by cable operator Numericable in a bidding war for French No.2 carrier SFR in March.
Low-cost player Iliad - whose arrival to the mobile arena in January 2012 sparked the price war now driving the pressure to consolidate - could also be interested in Bouygues.
The French state, which owns 27 percent of Orange, is pushing for a return to three mobile players in the hope of calming what Industry Minister Arnaud Montebourg has called “destructive competition”. He is worried operators will not invest enough in fast broadband networks key to the economy, and about job cuts in the sector.
Although backed by the French government, an Orange-Bouygues tie-up would face several obstacles. It would be scrutinized by European competition regulators because the new group would hold 49 percent of mobile and 48 percent of broadband subscribers.
To win them over, Orange would have to dispose of some customers, sell mobile frequencies and most of Bouygues’ network to Iliad, but it does not see such remedies as deal-breakers, said one of the people with direct knowledge of the matter.
“There are remedies; this is not going to prevent the deal from happening”, the person said.
If the deal goes ahead, Orange would be the first former state-owned telecom monopoly in Europe to consolidate its domestic market.
Orange has said previously it was “exploring opportunities” and favored consolidation. A spokeswoman for Lazard declined to comment, as did a spokesman for Credit Suisse in Paris.
Orange also wants to get Bouygues out of a mobile network sharing deal it signed with SFR in February since that accord would reduce the cost savings it could reap from the acquisition, said a person close to the company.
Orange filed a complaint in April to France’s Competition Authority about the network-sharing deal, which regulators are now examining. Orange wants to delay, modify or even annul the accord and clear the way for its dealmaking, added the person.
SFR says the network-sharing accord does not hurt competition, and that Bouygues cannot get out of it since no provision exists in the contract to allows its resolution if one of the parties is taken over.
A Bouygues Telecom spokesman on Tuesday said it continued to work with SFR on the implementation of the network sharing and no talks were underway to end it.
Because of its smaller size, Bouygues has been hardest hit by Iliad’s “Free Mobile” service. Its mobile market share declined by three percentage points and its operating margin fell to 15 percent in the first quarter from 22 percent in the same period in 2011, according to Berenberg analysts.
The firm said in May it would cut an additional 300 million euros in annual costs by 2016, partly through job losses, as it seeks to ensure its stand-alone future.
Mobile prices in France fell 27 percent last year and 11 percent in 2012, according to the telecoms regulator.
“Bouygues Telecom needs help,” the Berenberg analysts wrote last month. “The company is under pressure and needs to materially reduce its cost base and cut its labor costs.”
The analysts put a 50 percent probability on Orange or Iliad buying Bouygues Telecom.
Additional reporting by Gwenaelle Barzic, Jean-Baptiste Vey, and Mathieu Protard; Editing by Mark Potter