BREAKINGVIEWS-French telco LBO is risky bet on consolidation

By Jennifer Johnson

LONDON, July 8 (Reuters Breakingviews) - Patrick Drahi’s SFR has another potential suitor. Buyout shop Blackstone is studying a joint bid for the French mobile and broadband provider, which could be worth 30 billion euros, according to Bloomberg. The key question for any investor in SFR is whether a deal could lead to a long hoped-for consolidation in the tough French telecom market.

A sale of SFR has become more likely after Drahi secured a restructuring from creditors of his French business, Altice France, earlier this year. That deal saw creditors write down 21 billion euros of borrowings, but left Drahi with a sliver of equity to incentivise him to sell its key asset, SFR.

But a traditional buyout looks tricky. With a mooted valuation of around 30 billion euros, half of which is still existing debt, a new private equity buyer would need to stump up over 14 billion euros of equity. And the returns look low, given SFR’s slow growth, and the cutthroat French market, where upstart Iliad has grabbed market share by cutting prices, squeezing incumbent operators like SFR.

Turning the group around would be an uphill battle. Revenue fell nearly 6% last year to 10.1 billion euros, while the EBITDA margin dropped to 33% from almost 35% in 2023. Assume a new investor were to boost growth to 4% per annum, and restore the margin to 36%, and they would still only eke out a 12% internal rate of return, according to a Breakingviews calculation. That assumes they pay the reported 30 billion euros, use debt equivalent to the current 4.5 times EBITDA, and sell after five years at the same implied 9 times EBITDA multiple.

Yet a turnaround could be easier if SFR were bought by a rival. That would bring the market down from four operators to three, allowing the remaining players to raise prices, and gain new customers. That may be why private equity bidders like Blackstone are likely to join forces with an existing telecom group.

Consolidation in France is arguably more likely than ever before. Four-to-three unions now have a precedent in Europe, following Vodafone’s VOD.L merger with Three in Britain, which completed in May. Still, the configuration of any such deal would be hard to predict. A merger with Orange ORAN.PA, the market leader, looks unlikely. The more plausible explanation is that a buyout shop would invest alongside one of the smaller players, like Bouygues or Iliad, and sell off businesses or customers to the others.

No matter the configuration, a deal would still involve some risk. French regulators could demand tough remedies to see the number of operators fall, such as insisting on minimum prices or investment levels. And, even if the number of operators comes down to three, France will still be a slow-growth market, with Iliad, backed by Xavier Niel, hungry for market share. Buying SFR is not for the faint-hearted.

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CONTEXT NEWS

Blackstone is among the private equity groups studying a bid for Patrick Drahi’s French telecom operator SFR, Bloomberg reported on July 7, adding that a bid could be part of a joint deal with another telecom operator.

SFR, which recently completed a debt restructuring, could be valued at up to 30 billion euros including borrowing, Bloomberg reported, citing people familiar with the matter.