Orange Advances Talks on Acquiring Bouygues Unit - Report

By Nick Kostov and Sam Schechner

PARIS--Orange SA (ORA.FR) has signed a confidentiality agreement with conglomerate Bouygues SA (EN.FR), deepening negotiations to acquire its telecom unit for 10 billion euros ($10.86 billion), French newspaper Le Journal du Dimanche reports Sunday.

As part of a potential deal, Orange would pay Bouygues EUR8 billion in shares and EUR2 billion in cash, the newspaper says. On Dec. 24, the two sides signed a confidentiality agreement, a traditional step toward more formal merger talks, and will meet to discuss the sale next week, the report adds.

A person familiar with the matter told Dow Jones Newswires in December that early-stage discussions started in October when the Bouygues camp approached Orange to discuss the sale of its telecom unit.

A spokeswoman for Orange declined to comment on the report Sunday, while a spokesman for Bouygues didn't return calls seeking comment.

An Orange-Bouygues deal would give the former French monopoly heft ahead of what European telecom executives expect will be a winnowing of their herd. Telecom chieftains say they need to be bigger in order to compete with Silicon Valley firms that increasingly offer a free suite of communication services, from text to video chat.

Executives at Orange have worried their company is too small and risks becoming prey rather than predator when the industry giants begin their hunt. As of Friday, markets valued Orange at roughly EUR41 billion, compared with EUR54 billion for Telefonica SA (TEF) of Spain and EUR76 billion for Germany's Deutsche Telekom AG (DTE.XE).

If Orange pays for Bouygues Telecom largely in stock and merges the firm into Orange, the combined company could see its market capitalization grow to as much as EUR50 billion, depending on how investors regard the deal.

Orange wants to "swallow rather than be swallowed," a person close to the company said in December.

In France, the deal could help the country's incumbent telecom operators recover from a lean four years, following the entry into the mobile market of a fourth operator.

Iliad SA's (ILD.FR) Free Mobile set off a price war that caused revenue to slide and profits to plunge. The competition also forced the companies to accelerate their rollout of high-speed 4G networks in a bid to hang on to subscribers--further eating into profit.

Bouygues Telecom suffered the most, because it had a larger staff relative to its base of subscribers. The lower profit also hit profit at competitor SFR, leading then owner Vivendi SA (VIV.FR) to embark on spree of asset sales that eventually led to SFR's purchase by cable magnate Patrick Drahi.

The value of the reported Orange-Bouygues deal is similar to the EUR10 billion bid that Mr. Drahi made for Bouygues Telecom last year. Martin Bouygues, the controlling shareholder in Bouygues, turned down that offer, saying a sale to Mr. Drahi would put French jobs at risk.

Analysts had suggested that Mr. Bouygues would have a difficult time justifying a sale at a lower price to his shareholders.

Even if Bouygues and Orange can agree on a deal, it is far from a fait accompli. Five years ago, French officials helped push through the creation of a fourth mobile operator in the country in order to boost competition and lower consumer prices--goals that were roundly achieved. French Economy Minister Emmanuel Macron said in December that he wasn't opposed "in principle" to telecom consolidation, however.

Write to Nick Kostov at [e-mail] and Sam Schechner at [e-mail]

(END) Dow Jones Newswires

January 03, 2016 12:37 ET (17:37 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.