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Fitch: French Telco Merger Would Benefit Vivendi, Orange

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Vivendi's credit profile is likely to benefit more from a merger of its telecoms business by accepting one of two competing bids than it would from spinning off the unit as planned, Fitch Rating says.

Bouygues this week offered EUR10.5bn in cash to merge its Bouygues Telecom unit with Vivendi's SFR, France's second-largest mobile operator. Altice made a competing EUR11bn cash bid to merge Numericable, the French cable network operator, with SFR. In both offers, Vivendi would also end up with a significant minority stake in the new merged entity.

For incumbent Orange, a merger between SFR and Bouygues Telecom would be better than a SFR-Numericable tie-up. Orange's French mobile business (2013 revenue down 10.3%) has been hit by intensive price competition over the last 18 months. A reduction of mobile operators to three from four could reduce competitive intensity, not just in mobile but also in France's fixed market.

Considerable uncertainty surrounds both proposals.

A merger between SFR and Bouygues Telecom would attract greater regulatory scrutiny as reduced competition could lead to higher prices for consumers. From an anti-trust perspective, the SFR-Numericable tie-up should be less complicated as Numericable does not operate a mobile network. In either case, Fitch says that it believes that it could take nine to 12 months for regulators to approve a deal. France's Industry Minister Arnaud Montebourg has been reported as saying that the government will closely scrutinise the impact of the bids on employment and investment.

The prospective mergers in France come as the European Commission nears completion of its review of mobile consolidation in Germany and Ireland. As the two potential SFR transactions involve French companies, the commission might not have jurisdiction over them, leaving them to the French anti-trust authorities.

Vivendi is already expected to have a strong balance sheet after the sale of its stake in Maroc Telecom, which we expect will be completed in the next few months. It ended 2013 with a pro-forma net debt/EBITDA of around 1.4x.

Without SFR, Vivendi's leverage threshold to maintain its 'BBB' rating would likely be lower than the current 2.5x net debt/EBITDA. In general, telecoms companies are better suited to sustaining higher leverage than media companies at the same rating level. Even without selling SFR, Vivendi would still have headroom at the 'BBB' rating level to pursue investment strategy focused on its media assets.

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Tags: sfr  vivendi  bouygues telecom  orange  France