Well now its official; Vivendi will sell its mobile phone subsidiary SFR to Patrick Drahi’s Altice group. Three weeks ago, the French media and entertainment giant accepted a binding offer by Patrick Drahi’s Altice Group to buy Vivendi’s mobile phone unit SFR as their preferred choice to enter into a final, exclusive, negotiation period with them.
The second-placed bidder Bouygues Telecom, which is presently the third largest mobile phone company in France, behind Orange and then SFR itself, has twice reshuffled its own bid in the interim since to try and catch up. In addition Bouygues added a provision to pay a substantial break up fee to Vivendi if their offer was later rejected, by French or European Union antitrust authorities, quite possible as it would lessen the number of mobile phone competitors in France from the current four to only three.
Drahi’s bid, in contrast, offered Vivendi a continuing liquid stake in the upside of SFR, included in the idea of merging SFR with Drahi’s 40% controlled, and now recently publicly listed as well, French cable affiliate Numericable France.
Crucially for the Drahi bid, Numericable is presently solely a cable company with no mobile phone operations at all, giving them a distinct antitrust advantage. This did not stop the French Economy Minister Arnaud, however, Montebourg from complaining about Drahi’s offer, saying he was just a foreigner and it would in fact be a good thing for France if competition were lessened if Bouygues should buy it instead – and even especially because the number of carriers would be reduced from four to just three.
Be that as it may, at the end of the three week period Vivendi’s Supervisory Board of Directors met for a long session on Friday, and again on Saturday, before concluding that in the end in their view Drahi’s bid is the best for Vivendi’s shareholders.
Not that that was an entirely straightforward thing to do as the structures of the two offers were very different, making value estimating more complicated than in a conventional auction for cash, say.
Accordingly however, earlier today Vivendi announced it has accepted the Altice/Numericable offer for SFR, even after considering the additional inducements offered by Bouygues, which of course it was obliged to do.
The Vivendi Supervisory Board was presented with a report from a Special Committee of the Board it had set up to examine the different options available to it, which even included a possible demerger and flotation of SFR on its own.
The Vivendi Supervisory Board discussed that report and then voted unanimously to select the Altice/Numericable offer which it says, in its view, corresponds to the industrial project offering the highest growth potential, generating the highest value for its customers, employees and shareholders, and best met Vivendi’s own objectives.
In summary, Vivendi will now receive US$18.5billion (Euros 13.5 billion) in cash alone when the deal finally closes for SFR, plus a 20% stake in the combined SFR/Numericable France publicly listed entity. Altice itself will hold 60% of the entity, thus leaving a 20% free float.
In addition Vivendi could receive an additional US$1 billion (Euros750 million) if the annual EBITDA minus capex of the combined entity crosses a US$2.75 billion (Euros 2 billion) threshold.
Vivendi will have the right to board representation, and a veto power over certain key decisions that could impact its interests, as long as it holds a 20% minority position.
After a one year lock up period Vivendi can sell shares, with a preemptive right to Altice. Altice will also have market value calls on Vivendi’s position between the 19th and the 43rd months, post-closing.
More philosophically, Vivendi says it likes the quality of the Altice proposed industrial project, of combining SFR with Numericable France. Vivendi’s view is predicated on the coming convergence of fixed and mobile telephony, and with expected synergies resulting from the interdependence of the two merged entities’ networks.
SFR plus Numericable’s positions in very high speed fixed and mobile telephony will generate new growth opportunities, in Vivendi’s mind, and an acceleration of the number of connected lines and very high quality options for enterprise and retail customers. They will also offer important development opportunities for Quadruple Play packages, which is the latest marketing trend, and should attract new usage. All of this Vivendi considers to be consistent with the French government’s “France Très Haut Debit” plan launched on February 2013, for eventual nation wide ultra high speed internet connectivity.
Vivendi also considers the plan presented by Altice/Numericable fully guarantees the development of sustainable levels of employment, in particular thanks to new investments Altice is planning – which is important to it and of course is to the French government as well. Of course this is perhaps slightly disingenuous, as if Bouygues should now suffer as a result because of a war for market-share, then jobs could be lost there instead.
Finally, Vivendi chose what it considered the most balanced offer between cash upfront and stock participation, allowing the group to benefit from the highest total valuation over time. Under the terms of the choice it has made to go with Patrick Drahi Vivendi itself values the total package at in excess of US$23 billion (Euros 17 billion).
Under the next steps, in order to proceed to a closing of the transaction Vivendi will now consult with its Works Councils on the plan presented by Altice/Numericable, and begin the process of obtaining authorizations from the relevant administrative and regulatory authorities. Vivendi will then report to its annual Shareholders Meeting on June 24 on progress the transaction is making to a conclusion.
This is a triumph for Patrick Drahi, who has survived significant personal and business attacks to bring this merger together. After building up his own businesses in recent years, he successively took Altice itself, and then Numericable France, public with major IPOs in recent months. This gave him the vehicles he needed with bankers and the financial community to raise the major capital for a transaction of this kind, and to have the attraction of a publicly listed stock available to tempt Vivendi, successfully, into merging its SFR unit with Numericable France.
It is tempting to conclude the business could suffer in the ongoing mobile phone pricing wars that have broken out in France, however with a strong base in the Numericable cable operations, and as a low cost operator to begin with it, is possible Patrick Drahi considers he could have more to gain than to lose once the dust has settled.
As well, the European parliament just last week voted to set a course towards finally getting rid of mobile roaming fees within the European Union. And, French mobile phone costs prices have already dropped 30 percent since price breaker Iliad became the fourth carrier in 2012.
Judging by the strong efforts Drahi’s challenger Bouygues Telecom made in the final stages of this just-concluded bidding process, however, to try to win the day themselves, it could be they agree with him – and it may now be they who get squeezed in the middle of the sandwich, rather than Altice/Numericable/SFR.