Vivendi hunts for the right telecom exit

By Leila Abboud and Gwénaëlle Barzic

PARIS (Reuters) - The traditional shoppers' warning is caveat emptor, or "buyer beware". When Vivendi's board meets on Friday to choose between two bids for its French telecom unit SFR, "seller beware" may be more appropriate.

Both offers - from conglomerate Bouygues and local cable operator Numericable - leave Vivendi with a significant minority stake in the newly-created operator and continued exposure to the French telecom market, which has been in the throes of a price war since 2012.

Complicating matters further, Bouygues' bid has garnered support from an outspoken industry minister who says it better serves France's interests, as well as the backing of the other telecom companies - leader Orange and low-cost challenger Iliad - which would benefit from taking the mobile market back down to three from four players.

So will Vivendi's board members - led by veteran chairman Jean-Rene Fourtou and his chosen successor, tycoon Vincent Bollore - be able to drown out the noise and decide what is best for the group and its shareholders?

The two men agreed last year to split off SFR by this summer as the final move in a two-year effort to slim down Vivendi and refocus it on its media businesses. The move led Numericable and Bouygues to come in with competing bids for SFR.

Vivendi is still sure it wants to exit telecoms as quickly as possible, said a person familiar with its thinking.

There is no sign that the brutal competition touched off by the arrival of Iliad and its Free Mobile brand is abating. Core operating profit at SFR halved from 2011 levels to 1.07 billion euros ($1.48 billion) last year and Vivendi took a 2.4 billion euro writedown on the business in February.

But the multiple factors at play - including potentially long antitrust reviews and the bid structure with a portion paid in shares - mean the choice between Numericable and Bouygues will not be easy, said three people close to the group.

Vivendi could also still decide to stick with its original plan to spin off SFR, the people said.

"It's going to be very close," one said of the decision.

Two of them also said they feared Bouygues' effort to head off antitrust concerns by agreeing to sell 15,000 mobile antennas and a chunk of spectrum to Iliad could backfire by creating a "super-charged" Free Mobile that would gore the future profits of SFR-Bouygues.

"Anything that makes Xavier Niel so happy should worry us," said the second person, referring to Iliad's billionaire founder who has thrown his weight behind Bouygues' bid.

As of Tuesday, Vivendi saw the Bouygues and Numericable bids as being roughly even financially, the third person said.

It also believes both deals would have to go through an in-depth antitrust review in France that can take around nine months, the first person said, although the Bouygues bid could take longer to review because it would create the country's biggest mobile operator with 42 percent market share.

Vivendi has given the two sides until Wednesday night to submit any changes or final improvements to their bids.

Bouygues has offered Vivendi 10.5 billion euros in cash and a 46 percent stake in new the company, while Numericable has offered 10.9 billion euros and a 32 percent stake. Both promise massive cost savings from the tie-ups - Bouygues 10 billion euros and Numericable anywhere from 6 to 12 billion euros - which would flow in part to Vivendi if achieved.

Numericable backer Patrick Drahi told Les Echos on Wednesday that he would not raise his bid. Bouygues declined to comment.

A CLOSE RACE

Henri Lachmann, former CEO of Schneider Electric and administrator at Vivendi since 1998, is in charge of a four-person committee that is now preparing a recommendation for the full board. The 14-member board is set to meet on Friday.

A significant factor weighing in Numericable's favor is that Vivendi would get a quicker, less risky exit from telecoms because Numericable shares are already listed, said two of the people. Soon after antitrust approval was secured, Vivendi could begin reducing its stake depending on any lock-up periods.

If Vivendi accepts the Bouygues offer, the earliest it could start to reduce its stake would be mid-2015 after an initial public offering of the combined entity.

In this scenario, Bouygues Telecom would be spun out from conglomerate Bouygues, merged with SFR, and then listed. It carries with it risks not only because stock market conditions are unpredictable, but also because SFR-Bouygues' results could worsen by then, making Vivendi's 46 percent worth less.

But insiders cautioned against thinking Numericable was the favorite just because it held out the promise of a quicker exit for Vivendi. The board is wary of another ill-considered decision on SFR after buying out British group Vodafone's minority stake in 2011 - six months before Iliad came on the scene - for what now looks like a hefty price.

"It's more complex than just choosing what seems like the simpler option," said the first person, adding that governance, synergies and political factors would be taken into account as well as the liquidity of Vivendi's stake.

Also at play is whether Vivendi would prefer having Numericable's founder Patrick Drahi or Bouygues patriarch Martin Bouygues as a long-term partner.

"Some people favor Drahi and some prefer Bouygues. The debate is still going on," the person added.

($1 = 0.7212 Euros)

(Additional reporting by Sophie Sassard and Matthieu Protard; Editing by Andrew Callus and Mark Potter)