VIVEF Vivendi (PK)

By Inti Landauro And Sam Schechner 

PARIS--French telecom operator Orange SA has entered preliminary talks to buy the telecom assets of construction-to-media conglomerate Bouygues SA in an attempt to consolidate France's cutthroat broadband and mobile industries.

The two companies said Tuesday they had signed a confidentiality agreement. The move paves the way for the firms to exchange crucial financial information to assess a possible deal, deepening preliminary talks that have been under way since October.

"These discussions aren't limited by any particular calendar and hold no commitment to any particular predefined outcome," Orange said.

A deal would help France's telecom operators recover a yearslong price war stemming from the rise of a fourth mobile operator owned by Iliad SA.

Bouygues Telecom suffered the most from the subsequent price war, because it had a larger staff relative to its base of subscribers. The increased competition also affected competitor SFR, leading then owner Vivendi SA to embark on spree of asset sales that eventually led to SFR's purchase by cable magnate Patrick Drahi.

Shares in France's telecom sector rose sharply early Tuesday on hopes that an Orange-Bouygues Telecom deal would ease competition and bolster prices. Orange and Bouygues shares rose 1.3% and 0.2% respectively in early trading. Shares in cable and mobile-telecom operator Numéricable-SFR SA surged 8% while Iliad rose 2.9%.

A combination of Orange, France's biggest operator, and the No. 3 operator Bouygues Telecom could require the disposal of significant assets to receive approval from antitrust authorities, according to analysts.

Orange and Bouygues didn't provide any estimates valuing a potential deal. According to French weekly Le Journal du Dimanche, Orange is preparing a 10-billion-euro ($10.08 billion) offer for Bouygues Telecom. The former national telecom monopoly would pay Bouygues EUR8 billion in shares and EUR2 billion in cash, the weekly said on Sunday.

Both companies have declined to comment on the report. The French government, which owns a 23% stake in Orange, declined to comment Tuesday.

An Orange-Bouygues deal would give Orange, formerly known as France Telecom, heft ahead of what European telecom executives expect will be a winnowing of their herd in the face of stiffening competition from international rivals. Telecom chieftains say they need to be bigger to compete with Silicon Valley firms that increasingly offer a free suite of communication services, from text to video chat.

Executives at Orange have worried their company is too small and risks becoming prey rather than predator when the industry giants begin their hunt.

Orange had a market capitalization of roughly EUR41 billion, compared with EUR54 billion for Telefonica SA of Spain and EUR76 billion for Germany's Deutsche Telekom AG, at the end of last week.

If Orange takes control of Bouygues Telecom in a mostly stock deal, the combined company could see its market capitalization grow to as much as EUR50 billion, depending on how investors regard the deal.

Write to Inti Landauro at inti.landauro@wsj.com

(END) Dow Jones Newswires

January 05, 2016 07:09 ET (12:09 GMT)

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