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General

French market: a weak cable company and a strong challenger

Monday 11 April 2016 | 12:57 CET | Background

There are four major players on the French market: Orange, SFR, Bouygues Telecom and Iliad. The entry of Iliad on the mobile market four years ago led to a serious shake-up, the consequences of which are still being felt. A recent attempt to break up Bouygues Telecom and divide the assets among the other three proved a failure (the same as in mid-2014). Something still needs to happen at Bouygues, as the operator's low margins and cash burn can't last forever. Iliad, which operates under the brand Free, has not only built up a significant market share, but also has solid margins, positive free cash flow and a strong balance sheet. SFR and Bougues are each working on a recovery, but the latter is still likely to be sold. 

As we did earlier with the Dutch and Belgian markets, we take a look here at the cost structure of the French operators. France also shows one strong and stable operator, but otherwise shows a different picture than its smaller neighbours. 

SFR low margin, Iliad strong challenger

Cable operator SFR (previously Numericable, part of Altice) has mobile activities, giving it an edge over Ziggo and Telenet, which are both still preparing their mobile networks, through respectively a joint venture with Vodafone and the takeover of Base. The same as Ziggo, SFR has negative growth. However, in contrast to Ziggo and Telenet, it's also suffering from low margins, due to the tough competition on the mobile market. While its Belgian and Dutch peers have room if needed to lower prices, this is no longer an option for SFR.

The challengers on the French market also show a different picture. Bouygues Telecom is having a rough time, similar to T-Mobile NL, Tele2 NL and Mobistar, but Iliad is a leading light among challenger operators. With an extremely simple offer (one very extensive mobile plan for EUR 20 per month and a basic offer for EUR 2 per month), the company has been able to take 17 percent of the mobile market. Furthermore, it has a good EBITDA margin (well above 30%), positive free cash flow and a debt ratio of just 0.8x, giving it one of the strongest balance sheets in the European telecom sector.

Orange and Iliad stable, SFR and Bouygues have problems

Below, a summary of the situation on the French market, where a merger with Bouygues Telecom now appears to be off the table

  • Orange (in which the state is the largest shareholder with a big minority stake): revenue growth is slightly negative, the EBITDA margin is near 40 percent and free cash flow is around 20 percent of revenue. These are strong, stable numbers. The stable margin suggests that cost savings have been passed on to customers in the form of lower prices. This is confirmed by the falling trend in mobile ARPU. 
  • SFR: negative revenue growth (Q4: -2.9%), with an EBITDA margin around 30 percent (at Telenet and Ziggo: almost 60%). The free cash flow margin (suffering a recent dip) is comparable with Orange, but given the tight balance sheet (leverage over 5x), Altice will soon need to do something about the growth and/or margins. For 2016 it targets an improving revenue trend and around 5 percent growth in EBITDA. This is much lower than the 20 percent in 2015, so likely assumes lower prices.
  • Bouygues Telecom: revenue growth has turned positive, but the EBITDA margin is relatively low (below 20 percent). Free cash flow was negative in Q4 as well as the full year. Its latest plan targets a recovery in the EBITDA margin to 25 percent in 2017. Major cost reductions are planned (EUR 800 million or 40% of the 2011 cost level) and continued investments in fixed and mobile.
  • Iliad: growth is slowing, now at around 5 percent. EBITDA margin consistently over 30 percent and targets 40 percent by 2020. Free cash flow margin is minimal but positive (recently around 7%). Iliad aims to accelerate its roll-out of both LTE and FTTH.

All four operators are investing heavily in 4G, which should given them all national coverage within a year or two. On the fixed market, they offer mainly DSL as well as FTTH, but the weakest player, Bouygues is clearly not investing on its own in fixed/FTTH. They all aim to make it though the current market phase on their own by investing in LTE and FTTH, but most likely talk of a merger will emerge again, involving Bouygues Telecom with either SFR or Iliad. 



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