Bouygues is trading at a 12-month relative high versus the market, partly driven by the
anticipation of a sale of its telecom business to Orange. This is not the first time the
market has speculated about consolidation in France, but this time, according to the
press, Martin Bouygues is a willing seller. On 9 December, the French newspaper Le
Monde1 reported that Martin Bouygues had initiated talks with Orange to sell
Bouygues Telecom and in exchange acquire a 22% stake in Orange. According to an
article in Le JDD2 published on Sunday, negotiations between the companies should
accelerate this week, and an agreement could be reached as soon as the end of the
month or in January. Negotiations would also now involve Numericable-SFR and
Iliad, which could acquire Bouygues Telecom's network and other assets for €2bn. We
are more sceptical than the market on the probability of a deal on the terms rumoured
in the press due to the following considerations:
• Orange is unlikely to overpay – commercially, Orange has and should continue
to do well thanks to its superior network. As stated by management, Orange is the
operator least in need of consolidation. Hence we doubt it will be willing to pay
€10bn for Bouygues Telecom, as speculated in the press. Issuing shares to
Bouygues would also be very dilutive and could have a negative impact on Orange’s
share price. Orange trades on a 2016E EV/EBITDA of 5.9x and a 7.4% FCF yield to
equity. At €10bn, Bouygues Telecom would be trading on 11x 2016E EV/EBITDA
and generates no cash.
• Deal could easily be blocked – the main issue with Orange leading a deal is the
high probability it will be blocked by the competition authority. We have never seen
a merger between the number one and three mobile operators approved in Europe.
The regulatory oversight of such a deal is not clear, but in our view would most
likely be the European Commission as Orange is a pan-European operator. The
simple rule is that if two thirds or more of Orange’s European revenues are in