Fitch: Bouygues More Important for Iliad/Numericable Than Orange
A break up of Bouygues would benefit all the remaining operators by improving the market structure and reducing the risk from volatile competition as network capacity utilisation evens out. But Orange's success in stabilising its earnings indicates it could weather the tough competitive environment even if the deal does not materialise.
Without consolidation, the other operators face greater challenges because they overlap in target segments. They also need to build scale in mobile or fixed line, make significant planned investments in rolling out broadband networks, and generally suffer from weaker free cash flow margins.
Orange CEO, Stephane Richard, said the deal has a 50:50 chance of happening and it should become clear in the next few weeks whether it is likely to go ahead. None of the companies have announced details because discussions are still ongoing on pricing, structure and funding. The transaction is complex, involving four main parties, with potential asset carve outs and significant regulatory and political scrutiny.
It is likely that Iliad will be interested in mobile assets such as spectrum, networks and potentially some retail distribution while Orange and Numericable-SFR will probably be most interested in the fixed line and mobile customer bases.
Triple and quadruple play products, where customers buy a combination of mobile, fixed-line, internet and TV in a bundle, have a significant impact on pricing economics and adoption rates in the French market. The lack of scale in mobile subscribers for Iliad and fixed broadband subscribers for Bouygues Telecom have led to aggressive pricing strategies to grow market share rapidly and fill unused network capacity.
If such a deal went ahead we believe the new market structure would reduce pricing volatility by creating three reasonably sized operators with sufficient scale and profitability and a balanced distribution of mobile network capacity and utilisation. Iliad's current market share of mobile subscribers is 15% while Bouygues Telecom's market share in fixed broadband is 11% of subscribers.
The improved market structure would be positive for Orange's credit profile, reducing operational risks in the medium and long term. However the company has already demonstrated its ability to stabilise operations trends even against tough competition, which drove our revision of the Outlook on its 'BBB+' rating to Stable from Negative last year. This trend was confirmed in its FY15 results, with Orange hitting a target to stabilise restated EBITDA a year ahead of its plan. Investment in broadband mobile and fixed networks provide some differentiation and minimise churn but we expect cash flow to remain constrained as capital expenditure will be high until 2018.
The impact on Orange's leverage from a Bouygues deal would ultimately depend on the assets and EBITDA that Orange retains and the proportion of cash or debt used in the transaction. A deal financed with equity and no cash would add EBITDA and no incremental debt and could improve Orange's leverage along with an improved operating profile.