Orange SA (ORAN +0.15%), the largest telecom operator in France, recently halted talks to buy Bouygues Telecom, another French telecom company. Orange believes that the French telecom market should be cut from four to three major competitors but it struggled to come to a deal with Bouygues Telecom due to price disputes and antitrust laws. If Orange is able to come to an agreement to combine with one of its competitors, this will help continue its recovery in France and help Orange shift its focus to its faster growing international opportunities.
Orange's competitors agree that some deal, merger, or buyout within the French telecom market should occur to help combat rising costs of fourth-generation wireless networks. Even the French Economy Minister, Arnaud Montebourg, believes that the telecom market needs to work to consolidate. Although everyone involved wants consolidation to occur, they have been unable to come to an agreement. Bouygues Telecom owner, Bouygues SA (BOUYY 1.32%) , was unable to reach a deal to buy SFR, another large telecom company in France, owned by Vivendi SA. The newest competitor in the French mobile market, Iliad SA (ILIAF +0.00%), was also unsuccessful at coming to an agreement to buy Bouygues Telecom, since Iliad offered about $4 billion less than what Bouygues SA was willing to sell for.
Increased competition
When Iliad entered the French mobile market in 2012, it offered mobile plans significantly cheaper than its competitors, starting at two euros a month. This forced Orange, SFR and Bouygues Telecom to cut prices and costs. Although Orange and SFR have had significantly lower earnings since Iliad entered the market, they have not suffered nearly as much as Bouygues Telecom who many analysts believe will not be able to survive without a buyout or merger.
After Bouygues Telecom was unable to reach a deal with Orange or Iliad, it announced it was cutting 1,500 of its 9,000 jobs in an attempt to survive independently. Unfortunately these job cuts may not be enough to save Bouygues Telecom. As it continues to struggle, Bouygues SA may be more willing to sell at a lower price and the French government may push harder for consolidation. The French government owns about 27% of Orange giving it significant influence over Orange's actions. If Orange is able to come to an agreement with competitors to consolidate without violating antitrust laws, the combined infrastructure will cut costs and be beneficial to all companies involved.
Bottom line
For many years, Orange has worked to expand its telecom business to Africa and the Middle East in part through small acquisitions. In May 2014, Orange sold its Ugandan division, Orange Uganda, to Africell. Despite this sale, Orange still seems committed to international expansion which will likely be a large source of growth. Competition from Iliad has forced Orange to cut prices and costs but its low-priced services have been successful not only in France, but also in countries suffering from recessions, like Spain, which have led customers to switch to lower cost plans.
Iliad's entrance into France's telecom market led to a 79% drop in Orange's earnings. Since then Orange has been able to recover in France and will likely continue to recover especially if involved in acquisitions or mergers. Orange has historically paid high dividends, currently around 8%, and outside of France has a lot of potential to grow. These two factors make it a very attractive buy for investors.
