Bougues Telecom to Patrick Drahi: No thanks!

In a unanimous decision, the board of Bouygues Telecom has turned down an extremely generous offer by Patrick Drahi to acquire the wireless company and combine its operations under Altice’s Numericable-SFR brand.

The merger would have made Altice the largest mobile provider in France by far, kicking Orange to second place and likely ending a vicious price war that has long benefited French consumers with inexpensive wireless service.

Drahi’s debt-financed cash bid of $11.2 billion “vastly overvalued” Bouygues’ mobile assets and would have led to shareholders breaking out in spontaneous dancing on Wall Street if the deal involved two American wireless companies, according to French business observers.

But Bouygues’ board drove home its rejection, pointing out the vote against the deal was unanimous and any short-term gains were not in the best interests of Bouygues Telecom or its shareholders:

The board is convinced that the telecom market is at the dawn of a new era of growth driven by the exponential development of digital applications. It considers Bouygues Telecom uniquely positioned to benefit from this growth, knowing we have a strong and sustainable competitive advantage through our spectrum portfolio and a 4G network known as one of the best in the market.

The board also considered the fact there were significant regulator headwinds against any deal involving Patrick Drahi and Altice SA — a distraction that wasn’t worth disrupting Bouygues’ current business plan.

France’s Economic Minister Emmanuel Macron came close to declaring the deal reckless, stating that the scale of the proposed consolidation of France’s competitive mobile phone sector would hurt employment, investment, and consumers.

“The group,” a Bouygues news release said, “has always strived to write an industrial story that creates value in the long-term with its employees and suppliers, and in the interests of its customers, while respecting its commitments in terms of investment for the development of French infrastructures.”

That has been widely interpreted as a criticism of Drahi’s ruthless business style, which seems to focus on short-term gains that open investors, employees, vendors and consumers to significant risk if Drahi’s brand of cost-slashing and debt accumulation turns out to be unsuccessful.

Mobilicity, a struggling independent wireless carrier serving some of Canada’s largest cities, will end its efforts to compete with larger wireless companies if a court approves its sale to Rogers Communications, Canada’s largest mobile operator.

Late this afternoon, sources told The Globe and Mail Mobilicity accepted an offer from Rogers in excess of $400 million to acquire the wireless company’s assets and transfer some of its wireless spectrum to Wind Mobile Corp., one of the last remaining Canadian independent carriers, to appease regulators, who could still block a deal with Rogers.

The federal government’s wireless telecom policy has stressed the importance of having at least four wireless providers competing in every region. Wind has managed to achieve that in Ontario, B.C. and Alberta, but lacks enough coverage elsewhere. Mobilicity landed itself in financial trouble soon after launch, finding the costs of network construction high for a company with below-expected customer numbers.

Mobilicity has been under creditor protection since September 2013 and has only managed to keep 157,000 active customers on its discount cellular network. Rogers is said to be interested in Mobilicity primarily as part of a tax write-off strategy. Mobilicity had non-capital loss carry forwards of $567-million by the end of 2013, which offers Rogers a reduction in its tax bill of about 25 to 30% of that amount.

Observers predict Mobilicity could continue for a time, if in name only, as part of Rogers’ larger portfolio of wireless brands. Rogers already controls two other Canadian wireless brands: Fido and Chatr.

As late as yesterday, Rogers and Telus were both fighting to acquire Mobilicity after it became clear there would be no “white knight” for Mobilicity that would satisfy competition regulators or creditors. Telus attempted an acquisition twice, only to be rebuffed by the Competition Bureau. A last-ditch effort by Wind Mobile to acquire its comparatively sized competitor was a flop with creditors who expected a higher bid.

Mobilicity’s network coverage was always one of its biggest challenges. The company only managed to offer direct coverage in parts of the Greater Toronto Area, Ottawa/Gatineau, Calgary, Edmonton, and Greater Vancouver. Mobilicity’s network also relied on very high frequencies that had a challenging time penetrating buildings, and its lack of network densification led to complaints about dropped calls and poor coverage overall.

The disposition of an earlier plan submitted by employees and Mobilicity’s founder to transform the company into an MVNO — providing independent wireless service using its acquirer’s network, isn’t known at press time.

[flv]http://www.phillipdampier.com/video/BNN Clock ticking on Rogers and Telus to conclude Mobilicity takeover 6-22-15.flv[/flv]

As late as yesterday, BNN was reporting Telus and Rogers were both competing to acquire Mobilicity. It appears Rogers has won. (2:23)

John Malone’s cable systems in Europe share little in common with what Americans get from their local cable company. In Switzerland, Liberty-owned UPC Cablecom charges $95 a month for 250/15Mbps service — a speed Charter Communications customers cannot buy at any price. Liberty is Charter’s biggest investor/partner. Later this month, Swiss cable customers will be able to buy 500Mbps from UPC. When implemented, that is expected to push Switzerland’s broadband speed rankings into the global top-10. Currently Switzerland is rated #11. The United States is #28 and Canada is ranked #34.

UPC’s primary competitor  — telephone company Swisscom — is aggressively upgrading its facilities with its eye on offering G.fast, the latest version of DSL capable of delivering up to 500Mbps across 200-300 meters of old copper phone wiring, making it suitable for fiber to the neighborhood deployments similar to AT&T U-verse or Bell’s Fibe. Swisscom is also expanding fiber to the home service on a more limited basis, offering customers 1,000/1,000Mbps service on that network.

Tveter

Why all the upgrades? Competition in the Swiss broadband marketplace.

If Swisscom can offer gigabit broadband speeds, then so can UPC Cablecom, claims its CEO Eric Tveter.

“We can offer every customer across the country the same speeds,” Tveter told the Schweiz am Sonntag newspaper. “At the end of June, we will introduce new Internet speeds of 500Mbps. Demand for [fiber’s] symmetrical speeds is still very low among residential customers, but if demand increases we will offer them.”

Customers looking for gigabit speed would likely have to sign up as a commercial customer of UPC for now. But the company is preparing to introduce DOCSIS 3.1 which will allow the existing cable network to easily deliver gigabit speeds to residential customers. In fact, Tveter is looking at introducing 10Gbps speeds in Switzerland in the coming years.

Tveter aggressively criticized some of his biggest competitors for using marketing-speak to promote “new” products UPC already offers.

Some providers have promoted “cloud-based” on-demand access to video that Tveter says has been available from the cable company for several years.

This year, UPC Swisscom has been reassuring customers it does not allow America’s National Security Agency to spy on its customers and has taken measures to keep Chinese intelligence agents and hackers out of its network. The Swiss courts have made it clear they want nothing to do with NSA spying and permit operators to take any and all steps to keep unauthorized American and Chinese agencies from penetrating Swiss telecommunications.

Tveter points out all Swiss networks use equipment manufactured by U.S. and Chinese companies, but there are no indications either government has forced manufacturers to give back-door access to that equipment for surveillance or espionage purposes.

UPC Cablecom also voluntarily adheres to Net Neutrality principles for its Swiss customers.

[flv]http://www.phillipdampier.com/video/Swisscom fibre optic network 2014.mp4[/flv]

Swisscom shows the advantages of its fiber to the home network. (1:54)

Today’s offer by Altice SA to spent $11 billion to acquire France’s Bouygues Telecom and combine it with Altice-owned Numericable-SFR to create France’s largest wireless operator is not playing well in some quarters of the French government.

Patrick Drahi’s announcement he was borrowing the money to finance the deal worried France’s economy minister Emmanuel Macron, who felt Drahi’s leverage game in the mergers and acquisitions business came with a massive debt load that could have major implications on French taxpayers.

“I don’t want to create a too-big-to-fail player with such a leverage and it’s my role to … deliver such a message,” Macron said. ”If the biggest telecom operator blows up, guess what, who will pay for that? The government, which means the citizens.”

Macron is partly referring to the upcoming French wireless spectrum auction that will make more wireless frequencies available to the wireless industry. The proceeds will be paid to the French government and a default by Altice could have major implications.

Macron

Macron, himself a one-time investment banker at the Rothschild Group, said he was not fooled for a moment by Drahi’s claims the merger would benefit French consumers, especially at the overvalued price Drahi was willing to pay. Macron estimates Drahi has offered almost double the total market value of Bouygues Telecom, a conglomerate that also includes road construction and maintenance, commercial construction and television businesses — all elements Drahi would likely discard after the merger.

“All the synergies which could justify such a price are in fact about killing jobs,” Mr. Macron said. “At the end of the day, is it good for the economy? The answer is ‘no’.”

The merger deal is probably not good news for consumers either. France’s ongoing wireless price war among the four current competitors has reduced the cost of wireless service to as little as $3 a month since low-cost player Iliad broke into the French mobile market three years ago.

Virtually every French telecom analyst predicted the merger would be the beginning of the end of France’s cheap wireless service. Investors cheered the news, predicting higher priced wireless service would boost the value of their stock and increase profitability, while reducing costs. The deal’s defenders said ending the price war would attract necessary investments to upgrade French wireless networks and limit the impact of a bidding war for new wireless spectrum.

Drahi’s style of indebting Altice while slashing expenses at acquired companies has earned him suspicion from French officials.

Drahi’s style of doing business again raised concerns among several members of the French government. Drahi is notorious for severely slashing expenses at the companies he acquires, usually firing large numbers of middle managers and “redundant employees” and alienating those that remain.

But vendors complain they are treated even worse than Drahi’s employees. Electricity has been cut at Drahi-owned facilities for non-payment, employees have been expected to bring their own toilet paper to the office, and copying machines have been known to run out of toner and paper after office supply firms went unpaid for months.

After his $23 billion acquisition of SFR, the country’s second largest mobile operator, Drahi ordered SFR to stop paying suppliers’ outstanding invoices until vendors and suppliers agreed to massive discounts of as much as 80% on current and future invoices. A government mediator was forced to intervene.

Macron doubts Drahi has the interest or the financial resources to invest in Bouygues’ telecom business. Drahi has already indebted Altice with a spending spree of more than $40 billion over the last year acquiring Suddenlink Communications, SFR, and Portugal Telecom.

Drahi’s acquisition machine is fueled by “cheap debt” available from investment bankers looking for deals to meet investors’ demands for better yields from corporate bonds. Safer investments have faltered as interest rates have fallen into negative territory in parts of Europe.

French lawmakers, particularly those aligned with France’s labor unions, accuse Drahi of acting like a bulimic debtor and feared his splurge would eventually lead to a banker-forced purge and government bailout if he cannot meet his debt obligations in the future.

“If I stop my so-called bulimic development, I won’t have any debt five years from now. That’s idiotic, I won’t have any growth for five years,” Drahi curtly replied. “I think it’s better to continue to produce growth all while keeping a foot close to the brakes and looking in the rear-view mirror.”

Finance Minister Michel Sapin scoffed at the apparent recklessness of America’s J.P. Morgan and France’s BNP Paribas investment banks who readily agreed to offer financing for the deal, despite Drahi’s existing debt.

“We must be careful not to base an empire on the sands of debt,” he warned.

[flv]http://www.phillipdampier.com/video/Reuters French government hardens stance on Altice bid for Bouygues Telecom 6-22-15.flv[/flv]

Reuters reports Altice may be vastly overpaying for Bouygues Telecom and that has the French government concerned about creating a “too big to fail” telecom operator in France. (2:04)

In the last three years, several Wall Street analysts have called on cable and telephone companies to raise the price of broadband service to make up for declining profits selling cable TV. As shareholders pressure executives to keep profits high and costs low, dramatic price changes may be coming for broadband and television service that will boost profits and likely eliminate one of their biggest potential competitors — Sling TV.

For more than 20 years, the most expensive part of the cable package has been television service. Cable One CEO Thomas Might acknowledged that in 2005, despite growing revenue from broadband, cable television still provided most the profits. That year, 64% of Cable One’s profits came from video. Three years from now, only 30% will come from selling cable TV.

While broadband prices remained generally stable from the late 1990’s into the early 2000’s, cable companies were still raising cable television prices once, sometimes twice annually to support very healthy profit margins on a service found in most American homes no matter its cost. Despite customer complaints about rate hikes, as long as they stayed connected, few providers cared to listen. With little competition, pricing power was tightly held in the industry’s hands. The only significant challenge to that power came from programmers demanding (and consistently winning) a bigger share of cable’s profit pie.

The retransmission consent wars had begun. Local broadcast stations, popular cable networks, and even the major networks all had hands out for increased subscriber fees.

Rogers

In the past, cable companies simply passed those costs along, blaming “increased programming costs” in rate hike notifications without mentioning the amount was also designed to keep their healthy margins intact. Only the arrival of The Great Recession changed that. New housing numbers headed downwards as children delayed leaving to rent their own apartment or buy a house. Many income-challenged families decided their budgets no longer allowed for the luxury of cable television and TV service was dropped. Even companies that managed to hang on to subscribers recognized there was now a limit on the amount customers would tolerate and the pace of cable TV rate hikes has slowed.

For a company like Cable One, the impact of de facto profit-sharing on cable television service was easy to see. Ten years ago, only about $30 of a $70 video subscription was handed over to programmers. This year, a record $45.85 of each $81 cable TV subscription is paid to programmers. The $35.50 or so remaining does not count as profit. Cable One reported only $10.61 was left after indirect costs per customer were managed, and after paying for system upgrades and other expenses, it got to keep just $0.96 a month in profit.

To combat the attack on the traditional video subscription model, Cable One raised prices in lesser amounts and began playing hardball with programmers. It permanently dropped Viacom-owned cable networks to show programmers it meant business. Subscribers were livid. More than 103,000 of Cable One’s customers across the country canceled TV service, leaving the cable company with just over 421,000 video customers nationwide.

Some on Wall Street believe conducting a war to preserve video profits need not be fought.

U.S. broadband providers already deliver some of the world’s most expensive Internet access.

Analysts told cable companies that the era of fat profits selling bloated TV packages is over, but the days of selling overpriced broadband service to customers that will not cancel regardless of the price are just beginning.

Cablevision CEO James Dolan admitted the real money was already in broadband, telling investors Cablevision’s broadband profit margins now exceed its video margins by at least seven to one.

The time to raise broadband prices even higher has apparently arrived.

“Our work suggests that cable companies have room to take up broadband pricing significantly and we believe regulators should not oppose the re-pricing (it is good for competition & investment),” wrote New Street Research’s Jonathan Chaplin in a recent note to investors. The Wall Street firm sells its advice to telecom companies. “The companies will undoubtedly have to take pay-TV pricing down to help ‘fund’ the price increase for broadband, but this is a good thing for the business. Post re-pricing, [online video] competition would cease to be a threat and the companies would grow revenue and free cash flow at a far faster rate than they would otherwise.”

If you are already a triple play cable television, broadband, and phone customer, you may not notice much change if this comes to pass, at least not at first. To combat cord-cutting and other threats to video revenue, some advisers are calling on cable companies like Comcast, Time Warner Cable and Charter to re-price the components of their package. Under one scenario, the cost of cable television would be cut up to $30 a month while the price of Internet access would increase by $30 or more a month above current prices. Only customers who subscribe to one service or the other, but not both, would see a major change. A cable TV-only subscriber would happily welcome a $50 monthly bill. A broadband-only customer charged $80, 90, or even 100 for basic broadband service would not.

Neither would Sling CEO Roger Lynch, who has a package of 23 cable channels to sell broadband-only customers for $20 a month.

“They have their dominant — in many cases monopolies — in their market for broadband, especially high-speed broadband,” Sling CEO Roger Lynch told Business Insider in an interview, adding that some cable companies already make it cheaper for people to subscribe to TV and broadband from a cable company than just subscribe to broadband.

A typical Sling customers would be confronted with paying up to $100 a month just for broadband service before paying Sling its $20 a month. Coincidentally, that customer’s broadband provider is likely already selling cable TV and will target promotions at Sling’s customers offering ten times the number of channels for as little as a few dollars more a month on top of what they currently pay for Internet access.

Such a pricing change would damage, if not destroy, Sling TV’s business model. Lynch is convinced providers are seriously contemplating it to use “their dominant position to try to thwart over the top services.”

At least 75% of the country would be held captive by any cable re-pricing tactic, because those Americans have just one choice in providers capable of meeting the FCC’s minimum definition of broadband.

Even more worrying, FCC chairman Thomas Wheeler may be responsible for leading the industry to the re-pricing road map by repeatedly reassuring providers the FCC will have nothing to do with price regulation, which opens the door to broadband pricing abuses that cannot be easily countered by market forces.

Lynch has called on the FCC to “protect consumers” and “make sure there’s innovation and competition in video.”

Unfortunately, Wheeler may have something else to prove to his critics who argued Net Neutrality and Title II oversight of broadband would lead to rampant price regulation. Wheeler has hinted repeatedly he is waiting to prove what he says — an allusion to hoping for a formal rate complaint to arrive at the FCC just so he can shoot it down.