November 22, 2018 / 11:21 AM / 23 days ago

Breakingviews - French telco fight will become ménage à trois

The logo of cable and mobile telecoms company Altice Group is seen during a news conference in Paris, France, March 21, 2017. REUTERS/Philippe Wojazer

LONDON (Reuters Breakingviews) - Something must give in France’s telecoms market. Three tycoons and state-backed Orange (ORAN.PA) are bleeding each other dry in a price war: a monthly mobile phone tariff can now cost little more than a pain au chocolat. If billionaire owners like Iliad’s (ILD.PA) Xavier Niel, Patrick Drahi of Altice (ATUS.N) (ATCA.AS) and Martin Bouygues can set aside their egos, four will become three in 2019.

Third-quarter results illustrated the problem. Altice won about 380,000 mobile and 64,000 fibre-broadband customers in France in the three months to September. Yet lower prices meant revenue shrank by 5.5 percent year-on-year. Rival Iliad’s French sales also edged down despite customer gains. Bouygues Telecom (BOUY.PA), owned by its eponymous founder, increased revenue and EBITDA at a slower rate than capital spending in the first nine months of 2018.

That’s unsustainable. Only state-backed Orange consistently generates free cash flow. Its three rivals risk burning through resources that could otherwise be used to finance the building of new 5G networks. France’s chief telecom regulator, long an opponent of M&A, said in May the door is open to consolidation that boosts investment.

The question is who blinks first. Bouygues approached debt-ridden Altice about a tie-up in June, Reuters reported. Yet Drahi can easily raise cash since he’s open to selling a stake in his French cable network. The tycoon controls two-thirds of Altice, making an all-share merger difficult because it would give him too much control of the combined company. A cash buyer would have to take on most of Drahi’s 30 billion euro debt pile.

Iliad looks at least as vulnerable. Capital spending next year will be about the same as its EBITDA, on Refinitiv estimates, so the firm will burn cash after interest payments and tax. Niel could prop up Iliad himself, but risks throwing money into a black hole unless rivals merge. Lenders may balk at extending more credit to a company whose equity cushion has almost halved in a year.

The biggest risk is that billionaire egos get in the way. It’s well-known that Bouygues and Niel don’t get on. But Iliad’s share price is so low that Bouygues could pay a 40 percent premium in cash and keep the combined group’s net debt at a reasonable 3.5 times EBITDA. That may not be the perfect outcome for Niel, but commercial reality must eventually bite.

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