Orange, Bouygues Telecom confirm preliminary merger talks

After weeks of speculation, Orange and Bouygues Group confirmed they are in preliminary discussions over a possible merger between Orange and Bouygues Telecom.

The statements from the two France-based groups indicate that no decisions have yet been made, nor do the discussions guarantee any particular outcome. Bouygues Group further noted that a confidentiality agreement had been signed and more would be disclosed in due course.

Earlier this week, MarketWatch reported that Orange had tabled an offer totalling €10 billion ($10.9 billion), comprising €8 billion in shares and a further €2 billion in cash. A combined Orange and Bouygues Telecom would have a market capitalisation of around €50 billion -- some €9 billion more than Orange is currently worth -- the business news site added.

The eventual announcement that talks were taking place had been widely anticipated despite repeated denials from the two companies. Orange only recently said it is "the telecoms operator that has the least need for consolidation" in France. However, in September last year Orange CEO Stephane Richard raised the possibility that consolidation could return to the French mobile sector in 2016 once the country had completed its 700 MHz frequency auction, which ended in November 2015.

Bouygues Telecom has been consistently regarded as the clear target in any consolidation of the French market. Only in June last year, the company's owners rejected a €10 billion takeover offer from Altice and continued to insist that higher sales and cost savings would help boost profitability in the longer term.

However, the company has continued to grapple with the effects of the price war in France that was sparked by the entry of the hugely disruptive new entrant Free Mobile in 2012.

Indeed, CCS Insight analyst Kester Mann said France is ripe for M&A given the high level of competition triggered by Free Mobile.

"Almost overnight, one of Europe's most lucrative markets turned into one of the most challenging," Mann said. "Today's news will be welcomed by Numericable/SFR and Free as the elimination of a competitor strengthens their position in the French market," he added.

Whether or not Orange and Bouygues Group do come to an agreement, regulatory scrutiny will be a major stumbling block to any deal, Mann noted.

"The combined market share of Orange and Bouygues (based on both revenue and subscribers) would be above 50 per cent, thereby creating a very dominant player. As such, significant concessions would almost certainly be placed on any deal. These could include divestment of spectrum, retail stores and/or other assets in a bid to maintain market competition. This could lead to intense and complicated negotiations with SFR and Free," he said.

It's also not clear whether France's competition authority or the European Commission would be responsible for approving any deal.

As noted by the Financial Times, competition issues in mergers and acquisitions become a matter for the EC if less than two-thirds of the companies' EU-wide revenues come from their home country.

While this does not apply to Bouygues, Simon Weeden of Citi Research told the FT: "For Orange, it's tight -- right on the line."

For more:
- see the Orange statement
- see the Bouygues Group statement
- see this Financial Times article (sub. req.)

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