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SFR deal numbers add up for Numericable

Only a few months ago, mention of the name Patrick Drahi in France would probably have provoked a chorus of “Who?” The low-profile Franco-

Israeli billionaire may have spent years piecing together the country’s largest cable network, but few of its customers had ever heard of him.

That changed last month when Mr Drahi’s Numericable won a bidding war against French construction and telecoms conglomerate Bouygues to buy SFR, the country’s second-biggest mobile operator, owned by Vivendi.

The deal – Numericable has agreed to pay Vivendi €13.5bn in cash and a 20 per cent stake in the merged company – splashed Mr Drahi’s image all over the business pages. It also turned him and his company into a serious contender in one of Europe’s most competitive telecoms markets.

Assuming that the country’s competition authorities agree the deal, the new-look Numericable will be almost unrecognisable in size. Analysts’ estimates suggest that earnings before interest, taxes, depreciation and amortisation, a measure of profitability, will grow from just over €600m last year to roughly €3bn this year at the merged company.

The customer base will also swell as Numericable absorbs SFR’s almost 22m mobile subscribers, or about 28 per cent of the market.

Simon Weeden, a telecoms analyst at Citigroup, argues that synergies will come through cross-selling as Numericable offers its internet and fixed-line customers SFR’s mobile services.

A second will come from moving a chunk – 20-30 per cent initially, according to Numericable’s estimates – of SFR’s 5m internet and fixed-line customers to Numericable’s high-speed broadband service, presently available to about 5m homes in France.

SFR has to pay Orange, the market leader, about €9 per customer per month for use of the so-called “last mile” connection into people’s homes – something it would no longer have to once it can use Numericable’s infrastructure. Numericable has just over 4 per cent of France’s overall broadband market – but almost 60 per cent of its very high-speed segment.

A third will create savings as SFR’s launch of 4G services takes advantage of Numericable’s comprehensive fibre network in France’s urban areas.

“You need high-density cell towers to provide 4G and that is not cheap,” says Mr Weeden. “After the merger, SFR will be able to make use of Numericable’s existing underground cable.”

Questions remain, however. At a press conference in March, Mr Drahi said that his intention was to use SFR’s strong brand and marketing strengths to help close the gap between the €33 a month on average that it receives from each of its customers and the €42 that Numericable gets.

“We are here to create value for our company,” he said.

But doing that requires reversing the cut-throat, price-cutting backdrop that has characterised the French telecoms sector ever since Iliad, the low-cost provider controlled by billionaire Xavier Niel, began offering mobile services in January 2012.

As Mr Weeden of Citi puts it, “Numericable is making a bet that the worst of the competitive trauma is over, that the end game is approaching.”

Then there is the resulting company’s net debt, which is likely to start out at about five times ebitda – roughly twice the two or 2.5 times leverage that is typical of European telecom companies.

“Cable companies tend to be highly geared because they are growing revenues and cash flow,” explains Jerry Dellis, an analyst at Jefferies. “Life is different for telecoms companies. That means that Numericable is going to have to be disciplined.”

Influencing the extent to which Numericable rises to these challenges is whether the French telecoms sector will undergo further consolidation. Two years ago, as the government granted a fourth mobile licence to Mr Niel’s Iliad, the thinking was that the market needed more competition.

That is exactly what it got and average revenue per user has been falling ever since, hitting revenues and profits.

Today, the socialist government of President François Hollande seems to be tipping the other way, and it is no secret that Arnaud Montebourg, economy minister, would like to see three operators rather than four.

If he gets his way, and prices not only stabilise but possibly even increase, analysts think that Numericable’s outlook will improve considerably.

“Fewer competitors should cool the market and help prices,” says Mr Dellis of Jefferies.

“That would play to Drahi’s strategy.”

Bouygues weighs options amid signs price war is ending

As one of the most familiar faces in French corporate business, Martin Bouygues has been around long enough to experience the joys but also the despair that inevitably accompany life as a captain of industry.

In recent days, Mr Bouygues has been in the spotlight for his company’s 29.4 per cent holding in Alstom, the French engineering group, whose share price has risen 35 per cent in the past few weeks after it emerged that General Electric of the US was interested in buying it.

But there can have been fewer more disappointing days than April 5, when Vivendi confirmed that it would sell its SFR unit to Numericable rather than to Mr Bouygues’ eponymous construction and telecoms conglomerate.

For the 62-year-old veteran, who dropped out of university in 1974 to take up a position as a site manager at his father’s business, clinching SFR was paramount.

His Bouygues Telecom unit has suffered as much as his rivals in France’s price war, and its earnings before interest, tax, depreciation and amortisation have tumbled from €1.4bn in 2010 to just €880m last year while free cash flow has dropped from €406m in 2010 to €24m last year.

Mr Bouygues, a close friend of Nicolas Sarkozy, France’s centre-right former president, and of the present socialist president, François Hollande, saw in SFR an opportunity for acquiring the sort of scale that could halt, or at least slow, those falling numbers.

A tie-up would have married Bouygues’ 14.5 per cent share of the French mobile market, the third-largest, with SFR’s nearly 28 per cent. That combination would have seen Bouygues leapfrogging Orange to become the country’s largest mobile provider.

Little wonder that Mr Bouygues lobbied the government hard to back his bid and also used the local press to further his ambitions – a tactic that produced considerable annoyance among Vivendi’s board of directors.

What is next for Bouygues Telecom? One analyst who follows the company argues that in its favour are signs that the two-year-old price war may reaching its end.

That will probably mean a long-awaited stabilisation in revenues and, with it, a chance for the sector to catch its breath after a lengthy and bruising fight. “If Iliad keeps prices where they are today, the market will stabilise and Bouygues would remain a viable proposition,” he says.

But the analyst points out that viable is not the same as attractive. And whether Mr Bouygues is prepared to continue forming an also-ran in a far less lucrative sector than before – and at a time when groups are shelling out large sums to install 4G and fibre infrastructure – has become the subject of considerable speculation.

Many industry analysts consider a merger with Xavier Niel’s Iliad as more than possible – a scenario made all the more plausible by Mr Bouygues’ announcement during his pursuit of SFR that he would sell his mobile infrastructure network to Iliad in the event of a successful acquisition.

Mr Dellis of Jefferies says: “Given the recent pressure on the numbers, and having lost SFR, it is implausible to think that Martin Bouygues would plough on as before.”

For now, Mr Niel and Mr Bouygues are keeping tight-lipped. But many analysts give an eventual merger between Iliad and Bouygues Telecom a little more than a 50 per cent probability.

The good news for Mr Bouygues is that there are some signs that the price war may be entering its final phase. That, together with the possible sale of Alstom spelling a cash injection of several billion euros for the construction and telecoms group, implies that there is less urgency than before.

As Mr Weeden of Citi notes: “Freeing up cash flow would mean that Bouygues would avoid any risk of having to do a deal at a potential time of stress.”

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Infosys, an Indian multinational IT services company, may look at acquiring companies based in Nordic countries, the Economic Times reported. BG Srinivas, Infosys' president, was cited.

As per the report, Infosys earns USD 2bn in revenues from Europe and is keen on further growth in the Nordic region which entails Norway, Sweden, Iceland, Finland and Denmark. According to Srinivas' comments cited by the paper, the company's next acquisition may be similar to its prior purchase in 2012 of Zurich-based Lodestone for USD 350m.

Source The Economic Times