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Consolidation in France's telecoms market: all to play for

Stéphane Piot Partner, Consulting

Mobile operators as well as the French Minister of Economy have expressed their support for a three-player mobile market.

France

There has been a remarkable amount of activity in the French telecoms market over the past few months. Bouygues Telecom and SFR concluded the first significant network-sharing agreement in France in February 2014, which should enable the two operators to make about a 40% reduction in the 18 500 sites they have in non-dense areas (representing 56% of the population and about 80% of France's territory). The two operators expect significant savings from this agreement (about EUR100 million per year for Bouygues Telecom and EUR200 million per year for SFR) in a market that was severely hit by the price war initiated by Free Mobile 2 years ago.

Vivendi accepted Numericable's bid for SFR only 2 months after this network-sharing deal, following intense competition between the cable operator and Bouygues Telecom. However, the consolidation activity is clearly not over, as all mobile operators as well as the French Minister of Economy have expressed their support for a three-player mobile market.

Three scenarios for the development of France's telecoms market

There are various scenarios for the market's development, each of which could have a different impact on its structure, as well as on the Bouygues Telecom/SFR network-sharing agreement. The three scenarios that are most likely (and are being discussed by market players) are presented in Figure 1 and discussed below.

Figure 1: Three scenarios for the development of France's telecoms market [Source: Analysys Mason, 2014]

Figure 1: Three scenarios for the development of France's telecoms market [Source: Analysys Mason, 2014]

Scenario 1: Bouygues Telecom and Free Mobile merge

The financial community has anticipated a merger between Free and Bouygues Telecom for several years. It appears to make a lot of sense because Bouygues Telecom's mobile assets (physical sites and spectrum) and Free's fixed infrastructure complement each other. However, the two operators' different strategies (and the two shareholders' antipathy towards one another) have prevented this from happening for years. It is only recently that a sense of realism has driven the two players to begin negotiations.

The competition authority (and/or the EC) is very likely to require safeguards to be put in place to preserve competition in the retail market given the issues associated with such a merger occurring only 2 years after Free entered France's mobile market. These might include, for example, specific commitments to mobile virtual network operators (MVNOs) so that they could energise the market more effectively than at present. It is also unclear whether Bouygues Telecom and SFR's network-sharing agreement could be maintained in a three-player market that, in practice, would leave just two networks in 80% of France's territory.

Scenario 2: Orange acquires Bouygues Telecom

A second scenario that would have been unthinkable just a few months ago has emerged in recent weeks, with confirmation that Orange and Bouygues Telecom have been discussing a possible takeover. This scenario would likely involve three players because Orange's acquisition of Bouygues Telecom would be bundled with the sale to Free of Bouygues Telecom's towers and a significant share of its spectrum. This would also raise questions about the compatibility of the network-sharing agreement between SFR and what is currently Bouygues Telecom (but, under this scenario, would become a 'super Free').

Scenario 3: Free Mobile and Orange share networks

Another scenario that has not been discussed much recently but is still conceivable is the continuation of a four-player market. This could be a result either of the failure of the other M&A scenarios or of market players' efforts to avoid the expected stringent competition safeguards (we will explore the trade-offs between M&A and network sharing in a forthcoming article). In this third scenario, Free and Orange would have an incentive to reach a network-sharing agreement. This would replace the Free/Orange national roaming agreement, which generates about EUR700 million of revenue per year for Orange, but that should be gradually discontinued.1 This would also result in a market with two networks in non-dense areas, assuming the agreement had a similar scope to that between Bouygues Telecom and SFR. However, this scenario would provide the strongest justification for the second 'digital dividend' spectrum award (which has been rumoured to be 'imminent' for a year or so now) because Free would still need additional spectrum to support its growth.

In this context, Bouygues Telecom announced a restructuring plan on 11 June that appears to have two main dimensions:

  • significant cost reduction (mainly in back-end systems: marketing and IT)
  • increased aggressiveness on fixed offers.

This could be perceived either as a way for Bouygues Telecom to remain independent (after appropriate 'slimming down' to adapt to new market circumstances) or as a 'carrot-and-stick' approach for potential buyers – that is, encouraging a purchase by pre-empting the difficult manpower reduction decision that a new owner might have to make, while also threatening further value destruction in the market if Bouygues Telecom was to remain independent.


Analysys Mason is a major strategy consulting company specialising in telecoms and media, with 12 offices on 4 continents and a strong presence in the French market. We have substantial experience of supporting financial transactions and have performed market competition assessment in more than 20 countries. We work with fixed and mobile network operators, investors and regulatory authorities in structuring, valuing and implementing network-sharing agreements and appropriate regulatory frameworks. For further details, please contact Stéphane Piot.

1 The French Competition Agency's calls for the gradual and controlled termination of the national roaming arrangement enjoyed by Free Mobile can be found here: http://www.autoritedelaconcurrence.fr/user/standard.php?id_rub=483&id_article=2062.