Three to Tango ? French Telecom Sector warms up to M&A

On March 5, Paris based Vivendi confirmed that it has received two binding offers for a controlling stake in its SFR subsidiary
The offers have been provided by Altice, Numericable’s parent company, and by the Bouygues group, the Telecom and Construction giant. The offers will pit French industrialist Martin Bouygues against Patrick Drahi, the billionaire entrepreneur behind Altice, in a direct bidding war. 

Offers on the Table: Who is offering What?

Bouygues Offer: €11.3bn in cash with 43 per cent stake in the merged Bouygues-SFR entity

Numericable Offer: €11.75bn in cash plus 32 per cent in Nemericable-SFR merged entity

Bouygous trump card: Bouygues has agreed to sell part of its network and wireless spectrum to smaller French competitor Iliad (Free's parent company) for up to €1.8B ($2.5B) if Bouygues succeeds in its efforts to merge its mobile phone unit with Vivendi subsidiary SFR.
                                                                     
 TelecomIQ Analysis

• As of Sep-13 SFR, with 21 Million subscribers was the second largest provider behind the market leader Orange with a subscriber base of 26.8 Million

• A deal with Bouygues would mean that SFR+Bouygues would have a combined market share of 49%, ahead of the current market leader Orange. This deal could raise antitrust issues and thus face intense regulatory hurdles.

• The announcement by Bouygues that once the deal is through, SFR+Bouygues combined entity would sell off part of its network (15000 antennas and part of its spectrum) to Illiad for €1.8B ($2.5B) is aimed at placating the competition authorities and easing the anti-trust concerns. Illiad would also benefit by this as it would help Illiad to break away from Orange . Currently Free , the smallest operator (but by far the most aggressive!) has 7.4 Million customers and piggy backs on Orange's network. It currently pays Orange about €700m a year in network access fees. The sentiments were echoed  by both Bouygues and Illaid's shareholders , with Bouygues shares rising by 7% and Illiad's by 14% , while Numericable shares fell by 15% ( 10-Mar-14).

• Even though Bouygues has played its cards well, still the post-merger scenario would mean that Orange and Bouygues would reduce the number of operators from four to three . All the major European markets have four Mobile Network Operators and any merger which reduces the number of players has been met by stiff resistance from the European Commission.The latest example being is Germany, wherein the European Commission has launched an indepth probe into Telefonica's $11.8 billion bid for KPN's Eplus.

• Orange plus the SFR-Bouygues merged entity  would command a mammoth 90% of the French mobile market share and this could potentially harm retail customers and restrict entry of any new MVNOs (mobile virtual network operators)

TelecomIQ Verdict- Vivendi would accept Numericable offer

Prima Facie, the Bouygues offer looks lucrative but a deal with Numericable would pose fewer regulatory problems and anti trust issues. This would also mean that the merged entity could be listed soon  and Vivendi can easily cash out its stock.

Net Neutrality War -Verizon wins the Battle in US; Regulators holding ground in Brussels

In Jan,14 the DC court has ruled in favor of Verizon and has vacated the anti-discrimination and anti-blocking policies as ruled by FCC in 2010

The Case: Verizon (Appellant) Vs FCC (Appellee)

What was FCC Open Internet Order 2010?

In Dec, 2010, FCC- Federations Communications Commission, issued an order to preserve the free and open internet. Three basic rules were adopted-

1.      Transparency: Fixed and mobile broadband providers must disclose the network management practices, performance characteristics, and terms and conditions of their broadband services

2.      No Blocking: Fixed broadband providers may not block lawful content, applications, services, or non-harmful devices; mobile broadband providers may not block lawful websites, or block applications that compete with their voice or video telephony services; and

3.      No Unreasonable Discrimination. Fixed broadband providers may not unreasonably discriminate in transmitting lawful network traffic.

Verizon's appeal against FCC ruling

Verizon challenges the Open Internet Order on several grounds, including that the Commission lacked affirmative statutory authority to promulgate the above mentioned rules.

Jan, 2014-US Court of Appeals Verdict

· The DC court has vacated the FCC's anti-discrimination and anti-blocking policies 

· But it preserved disclosure  and transparency requirements 

Telecom IQ View: What does it mean for Verizon and others CSPs in a larger context on net neutrality debate

· Service Providers vs OTT players- The regulations have so far favored the latter

o Several cases have been registered over the years where Regulators have investigated CSPs for net neutrality violation. These cases mainly revolve around CSP traffic management, throttling, blocking content of OTTs

oWith the Rise of OTT players, Telecom Operators services have been reduced to "Dumb Pipes"

§ OTT content players have had devastating impact on Telecom service providers. In 2013, free social-messaging applications like WhatsApp cost phone providers around the world $32.5 billion in SMS revenues in 2013. This figure is projected to reach $54 billion by 2016 and $86 Billion in 2020.

§ There is not only loss in service revenue but OTT content players (mainly players like YouTube, Skype, Netflix etc.,) are responsible for driving up the network traffic on the Service providers network. Between 2012 and 2017, mobile traffic would grow 13 fold and video would account for 66% of all mobile traffic. This is turning up pressure on Service Operators to increase Capex and invest more on Network Upgrades. 

§ CSPs are struggling to monetize this investment but OTTs are making the most of the ubiquitous network thus adding to CSP’s frustration Regulators so far have been apathetic to the plight of communication service providers

· The court ruling in US , now paves the way for  new dynamics in the OTT-Regulators-Service Provider tussle. Operators for a change, now have a upper hand and potentially can resort to traffic optimization and blocking strategies or could start charging OTT content providers. Interestingly, one month after the ruling by the DC court, Comcast and Netflix announced an agreement  in which Netflix will pay Comcast for faster and more reliable access to Comcast’s subscribers. The market would start witnessing more such agreements.

· It would not be long before the tremors of this ruling would be felt in Europe, wherein leading providers like Telefonica, Vodafone and Orange would start taking European Commission and NRAs to court.