French telecoms operator Orange may soon face a crucial choice shore up its position at home by gobbling up a competitor or expand its presence abroad by making a play for Telecom Italia.
While talks have reportedly begun to take over the telecom assets of the Bouygues conglomerate, thus cutting the number of mobile operators in France to three, the time may be ripe to pounce on Telecom Italia, as two French companies have been increasing their stakes in the operator.
"Orange has a choice to make, to consolidate the French market or consolidate its position as a global operator with major scale in Europe, as doing both could possibly be complex," said Thomas Coudry, a Paris-based telecoms analyst at Bryan, Garnier & Co.
"But it is certain that Telecom Italia is an interesting target for many, not only Orange," he added.
Italy is seen as an appealing market for operators as it has been slower in rolling out high-speed internet, and Telecom Italia has a relatively open capital structure that could see investors take control.
Orange has so far refused to confirm its interest in Telecom Italia, as it has to comment on talks on taking over Bouygues Telecom.
But sources say it may be working on a way to do both.
"Our merger and acquisition services are working day and night to try to find a solution for January with the scenario being explored that would have Bougyues hold 15 per cent of the new company, the French state 19 per cent and employees four to five per cent," said a union source.
The solution for the merger would be an exchange of shares, which would allow Orange to hold on to cash to seek other acquisition prey, perhaps in Italy.
That is why one Paris-based analyst, who spoke only on condition on anonymity, said the two operations "should be viewed together".
In other words, Orange could be preparing a two-course meal of Bouygues Telecom followed by Telecom Italia.
"Orange is committed to consolidating the European market and Italy is a beautiful opportunity and the company knows it," indicated the analyst. "It is perfectly possible that an approach for Telecom Italia would be made together with Vivendi."
Vivendi, which was previously active in the French telecoms market with the mobile and home internet operator SFR, owns a 20 per cent stake in Telecom Italia.
'Three cushion bank shot'
The possibility of Orange snapping up Telecom Italia has raised concerns in Italy, including in the government, which is not enthused about the idea of another national champion being acquired by a foreign company.
"They are right to be afraid as each time an Italian company is bought, the heart of its skills emigrate to where its shareholder is located," said Alessandro Pansa, a professor of finance at Luiss Business School in Rome.
"But the government can't do much, it is the consequence of 10 years of poor management of the Italian telecoms market," he indicated.
But that doesn't mean that nothing can be done to make Telecom Italia harder to take over, which is what the company's current management tried to do last month.
At a general shareholders meeting, it sought to have the company's preferred shares, which get better dividend payments but hold no voting rights, converted into regular voting shares.
Vivendi succeeded in blocking the project, which would have diluted its shareholding and by creating more voting shares made any takeover costlier.
"But if someone really has a strategic interest in such a deal, a couple of hundred million euros won't make a difference," said Pansa.
What would make a difference is getting regulatory approval for the mergers. If the European Commission is open to consolidation on the international level, it is concerned about mergers in national markets.
"The present European Union Competition Commissioner Margrethe Vestager is very concerned that if the number of market players is further reduced, in individual countries, consumers will end up paying higher prices, and investment in networks will suffer," said Anne MacGregor, a lawyer specialised in mergers and acquisitions at the Cadwalader firm in Brussels.
Coudry shares a similar view that the commission appears to be taking a harder line on mergers within countries.
"But on the pan-European level, on the other hand, it is sending rather favourable messages about building continental giants capable of competing globally," he said
A wild card in an Orange bid for Telecom Italia is the investment into the company by Xavier Niel, the owner of the upstart French mobile and Internet operator Free Telecom.
With a 15 per cent stake in Telecom Italia, Niel "is in a position to influence" the terms of a sale of the company, said the Paris analyst who requested anonymity.
He added that Orange faces what in billiard terms would be a "three cushion bank shot" as Niel is interested in "what Free would get in terms of frequencies and infrastructure" as part of any merger between Orange and Bouygues.