France Telecom / Cable and Wireless Potential Deal Examined

France Telecom / Cable and Wireless Potential Deal ExaminedLast weekend there was a report that France Telecom (FT) were rumored to be buying Cable and Wireless (C&W) for GBP 4bn. FT has of course denied it.

Though the telco market is consolidating, it does seem an odd match.

FT is the French equivalent of British Telecom (BT) the incumbent operator. The French government still owns a considerable portion of FT (though it has recently released a number of shares on to the open market).

C&W a UK monolith

C&W comes from the old school of telecoms, it’s a giant. It was half of the duoploy with BT when the telecoms market deregulated in 1994 (under the Mercury brand). It became very cash rich (to the annoyance of C&W’s shareholders), but like every other telco was hit hard by the telecoms crash after the dot com boom. They sold of their US operations (apart from the Caribean where they are still a virtual monopoly and very profitable) and have concentrated on their core UK operations.

As a telco, C&W has become very aggressive with their pricing especially in the wholesale minutes market and carry a lot of traffic for UK “switchless” providers and Carrier PreSelect (CPS) companies. They’ve become so aggressive they’ve been accused of predatory pricing (i.e. selling under cost to win business in the hope that it wins further business) but that’s not been proven.

They are trying to move into new areas and have announced new products such as VoIP, but as yet these are really marketing noises.

France Telecom / Cable and Wireless Potential Deal ExaminedOne area where they have invested in and have made real progress is Local Loop Unbundling (LLU) with their purchase of Bulldog (for GBP 18m). Bulldog have now unbundled about 400 exchanges and have plans to unbundle another 400 by the end of the year.

The C&W and Bulldog acquisition has had teething problems, cutting over to the vastly increased C&W infrastructure didn’t go particularly smoothly with customers losing connectivity for hours at a time. There are still on-going problems.

FT and C&W, not an ideal match

Would FT purchase C&W, well they might, but it would be an expensive buy.

France Telecom / Cable and Wireless Potential Deal ExaminedWanadoo (the ISP arm of FT) has stated they are going to invest EU 300m in unbundling exchanges (in the first year) and rumour has it there’s a total of EU 1bn over 3 years for LLU. So FT could buy C&W just for the LLU aspects, but really does seem excessive. C&W bought Bulldog for GBP 18m and they’ve invested at least 10’s of million into them. So 4bn is a HUGE premium to pay for a ready made network and 10’s of thousands of customers. Wanadoo already have considerably more broadband customers than Bulldog.

C&W have a big network, with good links into most of the telecoms companies in the UK, that might be of some value but the global number of call minutes is decreasing (as people move to VoIP) and the value per minute is decreasing even more rapidly (as flat rate calls – especially in the VoIP arena – become the norm). A call to anywhere in the world is now approaching around 2c (on average) per minute.

Another minus point is that FT already have a UK network (they purchased Equant), so having an old legacy telecoms network can’t seem that attractive.

There’s also Orange to worry about (the mobile side of FT), they also have considerable UK telecoms infrastructure.

All in all it doesn’t seem a good fit, though of course there may be another completely hidden agenda.

France Telecom
Cable and Wireless
Bulldog DSL