Numericable’s acquisition of SFR – between State control and European perspectives for telecoms

It’s done. The second biggest telecom operator in France, SFR, was acquired yesterday by Numericable, after two months of intensive negotiations and suspense arising from the French government’s involvement in the deal.

Credit photo: Eric Piermont, AFP
Credit photo: Eric Piermont, AFP

 

SFR is held by the Vivendi group, while Numericable, the only cable operator on the French market, is held by Altice, a Luxemburg-based holding led by the Franco-Israeli billonnaire Patrick Drahi.

Although an initial exclusive negotiation agreement had been reached between Vivendi and Altice, several alternative offers were made by the third French mobile operator, Bouygues. These offers had the effect to increase the eventual acquisition price for Altice, which amounted to €13,5 billion in cash, a €750 million earnout and a 20% participation of Vivendi into the capital of the new structure. They also created suspense as to the identity of the final acquirer, as the government also pushed towards an acquisition by Bouygues and showed strong reluctance to Mr. Drahi’s offer. In the end Numericable drove Bouygues out of the table, even though Vivendi’s supervisory board was still undecided on Friday night.

The outcome of these negotiations, which had lasted for about two months, lead us to make two significant observations. First, despite all the efforts of the French State to support Bouygues’ offer, it is in the end a multinational group led by a cosmopolitan self-made man who won the bid – a that’s good news for the consumers. Second, competition issues seem to have had a great influence on the choice between Bouygues and Altice. It is interesting to note that the French telecoms market will stay as a 4-operators structure, while in the meantime the European Commission pushes for fewer but larger operators on the EU market through the Connected Continent package that has been adopted by the European Parliament this week.

How an outdated attempt for State intervention failed

Do not misinterpret me here. States have economic interests, and they are sometimes legitimate, especially in strategic fields such as telecommunications – a competent State should be concerned about the quality of its network and of technological innovation on its territory. The USA have understood this a long time ago, and developed an approach which some qualify as an entrepreneurial State. This approach consists in first supporting research, projects and innovation, then second letting the market decide on the outcoming products, and consequently on the creation of jobs, tax revenues, and economic growth.

But that’s precisely where the French State got it wrong in the SFR case. Through the mobilization of the traditional politico-financial French establishment (Bouygues being in the top-20 of the largest French companies, with a yearly €33bn turnover), the Minister for « Industrial Recovery » – recently nominated as the Minister of Economy under the new government – Arnaud Montebourg acted as if a French firm only would keep jobs. As a puppet, Bouygues would submit to the government and preserve jobs within SFR, regardless of the bad economic perspectives the sector faces. In a surprisingly chauvinistic declaration, Mr. Montebourg went so far as to state that Swiss-resident Drahi would have to come back to France if he was to acquire SFR. A declaration that shed some light on Mr. Montebourg’s views on the free movement of capital, one of the four European economic freedoms, which also applies when it comes to Switzerland.*

Arnaud Montebourg, the new French Minister of Economy and a fierce advocate of the "Made in France"
Arnaud Montebourg, the new French Minister of Economy and a fierce advocate of the « Made in France »

Tensions were thus palpable between on the one side State-supported Bouygues and Mr Drahi, the epitomy of the cosmopolitan self-made man. This scenario benefited Vivendi which probably took advantage of the activism of Bouygues to ask Altice more. If  prices for takeovers are often over the acquired company’s real value, this time the French government indirectly helped to confirm this pattern.

Maintaining four operators on the French market – when competition clashes with the European agenda

The French telecommunications market will accordingly welcome Numericable-SFR, an entity that will represent the second biggest force on the French market for mobile communication (around 30% of market share, after Orange’s 37%) and for fixed telephony (around 20% of market share). Aside from economic benefits the new entity can derive from the complementarity between its cable infrastructures and its mobile network, one should observe that the French market for mobile telephony will, at least for now, stay a 4-actors game, contrary to the hypothesis where Bouygues would have bought SFR. In 2011, a fourth operator entered the French mobile market: named Free, its agressive strategy with very low prices (2€ for unlimited texting + 2hours of call a month) led to huge savings for French consumers, who were 8 millions to switch from their former operator to Free (12% of market share!).

In early 2013 discussions happened between SFR and Free to consider a merger between them, as SFR was already facing difficulties. The Autorité de la Concurrence (the French Competition Authority) expressed at the time its disapproval of such an operation which would have the effect of going back to an oligopolistic market, with two « giants ». Since then the official stand of the Autorité de la Concurrence and of the ARCEP (the French Telecoms Regulatory Authority), which work together for the enforcement of competition in the sector, has been clear: going back to a 3-operators market is unacceptable.

Merger reviewal by competition authorities takes about six to nine months. If the final decision is negative, remedies have to be found by the merging parties, or a deal can also just be blocked if it is considered anti-competitive per se. The highly probable possibility for Vivendi to see the deal annulled by public powers on grounds of competition law must have been considered by them too great of a risk to accept Bouygues’ proposal. Selling SFR to a firm absent from the mobile sector represented the certainty of an effective merger within the coming year, even if guarantees concerning innovation concerning optical fiber and ultra-speed broadband will have to be shown by Mr. Drahi, alongside with guarantees on jobs preservation – a verbal promise to avoid job cuts during 36 months already worries trade unions which want a written commitment on 48 months. The French government does not abandon that easily its claims for control.

One question remains, however. The EU, through its recently adopted Connected Continent package (which also includes a provision protecting net neutrality), and through the voice of European Commissionner for Digital Agenda Neelie Kroes, is right now advocating for a Single Telecoms market. The Commission has notably taken into account the desperate claims of big European operators such as Orange or Deutsche Telekom for a more unified European market with less actors (around 150 operators are now present on the 28 Member States) and more capacity to invest in infrastructures as well as in innovation.

Fewer, but bigger actors, in order for the European market to keep innovation on track and to resist international competition? It seems that for both national competition authorities and for consumers, the solution is far from obvious.

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Numericable’s acquisition of SFR – between State control and European perspectives for telecoms

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