Bouygues’s M&A Calls Aren’t Getting Through
The more success Bouyges Telecom has, the more difficult it becomes to sell
What’s good for Bouyges Telecom may actually be bad for Bouyges shareholders.
The French conglomerate owns the third largest wireless carrier in France. After losing out in its bid to merge Bouygues Telecom with mobile company SFR last year, the pursuer has become the pursued. So far, however, Bouygues is playing hard to get.
Bouygues Telecom is operating at a loss. It accounts for only 13% of its parent’s revenues but about half of its total capital expenditure in 2014. And this trend goes back at least five years. Given France’s four-way mobile competition where the best that mobile operators can hope for is market share gains to maintain flat revenues, it is hard to see how the telecoms business can generate an acceptable return on capital employed without further consolidation—at least in the next few years.
The backbone of Bouygues is really its construction business which, in the past, has helped to offset losses in the telecoms unit. But it has fallen on uncertain times. Orders fell by 2% in 2014. Yet Bouygues’ share price has still risen 19% this year. It is now trading about 50% above its five-year average valuation on earnings before interest, tax, depreciation and amortization, on hopes that a deal to sell Bouygues Telecom is imminent.
Based on current share prices, Bouygues’ telecoms assets are being valued at about 8.5 times 2015 Ebitda, reckons Barclays, compared with the industry average of about 6 times 2015 Ebitda. Cost savings from any combination of Bouygues with another French operator should prove significant. Nevertheless, the higher the price, the tougher it is to make a deal work. Given its high level of past capital expenditure, Bouygues will likely want a hefty premium to justify those investments.
Iliad was spurned last year for an offer Bouygues considered too stingy. Orange has already said it won’t be leading consolidation in France, and has separately expressed interest in pursuing merger talks with Telecom Italia to broaden its pan-European reach. That leaves only Altice , which is busy integrating SFR with Numericable and likely won’t be ready for an expensive purchase anytime soon.
Bouygues is fighting its corner by slashing costs and subscription prices. It added an impressive 415,000 broadband customers in 2014, but at the same time lost 22,000 mobile customers. The company is aiming to lure a million new mobile customers and another million broadband subscribers by 2017, a target that will likely require a further painful squeeze on profitability to reach.
The trouble is that the more success Bouygues Telecom has at gaining market share, the less its parent company will need to sell and the higher the price tag. That offers little comfort for shareholders, who may be left just waiting for the phone to ring.