May 22, 2018 / 10:48 AM / 10 months ago

Breakingviews - French telco M&A requires more than regulatory nod

People walk under the logo of French telecoms operator SFR in Paris, France, August 8, 2016

LONDON (Reuters Breakingviews) - France’s top telecom regulator Sebastien Soriano has had a change of heart and is willing to countenance deals. But it will take more than his blessing for potential buyers, such as Bouygues, to bid for Altice or Iliad.

Soriano’s U-turn on Tuesday coincided with the publication of a report by regulator Arcep that showed telecom groups’ spending on broadband and mobile networks hit a record high of 9.6 billion euros last year, up 660 million euros from 2016. Availability of fibre broadband now outstrips customers’ willingness to switch from older copper lines. That helps explain Soriano’s openness to dealmaking between Orange, Bouygues, Iliad and Altice, which he previously feared might result in higher prices for consumers or reduced investment.

There’s a good case for Bouygues to buy Altice’s French unit SFR, or even Iliad. The two weaker operators have struggled to increase broadband and mobile subscribers. An enlarged group could cut costs and better shoulder the burden of building next-generation 5G mobile internet networks. Also, a painful price war may end if the number of operators falls from four to three. The average monthly revenue per mobile user has nearly halved in the past five years, to 21 euros last year, according to Bernstein.

Shares in all four telco groups rose on Tuesday, but optimism may be premature. Altice’s French unit has 16 billion euros of net debt, about four times EBITDA. That might deter potential buyers, whose credit rating could be affected by taking on such a burden. The company’s founder and owner, Patrick Drahi, would also probably have to dump some of the 7.8 billion euros of net debt sitting at higher-level holding companies onto the new group. He is unlikely to be able to service those borrowings if he loses French cash flow.

Iliad may be no more attractive given its growth is slowing in France. The group controlled by billionaire Xavier Niel is embarking on a risky venture into the Italian market, which is already fiercely competitive and lower-priced than most European countries. Shares in the company lost almost a fifth of their value last week but potential buyers might pick it up even more cheaply by waiting a year or so. The regulator’s assent is a necessary condition for a wave of dealmaking in France telecoms. But it is far from sufficient.


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