Vodafone has made no secret of its willingness to take control of SFR, the French mobile phone company owned by Vivendi Universal. The extent of this interest was underlined this week by revelations that it is preparing to make an unsolicited cash offer for SFR.
France clearly holds a number of attractions for the mobile operator. Subscriber penetration is well below the European average, giving decent prospects for subscriber growth. And with three mobile operators competing for market share, there are more than enough subscribers to go round.
"This is the European gem for Vodafone," says Mr Joel Ripley, analyst at JP Morgan. "This represents the least competitive and least penetrated major market in Europe. France has the best prospects for growth."
But how Vodafone proceeds in its ambitions to gain control of France's second-largest mobile phone group depends heavily on Vivendi's strategy.
Mr Jean-Rený Fourtou, Vivendi Universal's chief executive, will reveal more on his vision for the French media group on September 25th. Vivendi has already said it would like to hang onto its 44 per cent stake in Cegetel, the French alternative telecoms group that owns 80 per cent of SFR. But it could even seek to increase its holding if it decides to refocus its interests in French media, water and telecoms.
Mr Fourtou last month indicated that Vivendi would consider increasing its 44 per cent stake to above 50 per cent at the strategy meeting to be held on September 25th. He sees Cegetel as one of Vivendi Universal's most promising assets and a valuable source of cashflow.
On a standalone basis, JP Morgan estimates that SFR is worth about €15.22 billion. A control premium could inflate the value of SFR to perhaps €18.75 billion, according to some analysts, a level at which BT Group and SBC are expected to be likely sellers. BT has reaffirmed it will sell its stake at the right price.
At the upper end of valuations, the 68 per cent stake in SFR that Vodafone does not own would cost about €12.5 billion - a price it could easily afford without damaging its single A credit rating.
It is hard to see how Vivendi Universal could top such an aggressive control premium. But a raft of shareholder agreements also complicate a deal for any potential bidder. While "standstill" rights requiring universal shareholder agreement on a sale expire on September 23th, "tag along" and "pre-emption" rights remain in force after this date.
These give SFR shareholders the right to either sell their stake or increase it at the same price being offered by the bidder.
Vodafone does have some factors in its favour, not least that any offer it makes would catch Vivendi Universal at a moment of obvious weakness.
The French media group is in tense negotiations with its lending banks to secure a €2 billion rescue loan to buy itself time for an orderly disposal of assets. It says it needs to raise a minimum of €10 billion over the next two years, of which €5 billion must be secured in the next nine months if its credit rating is not to be further downgraded into junk territory.
To find, say, €3.91 billion extra cash to buy out SBC's 26 per cent interest in Cegetel and perhaps €2.34 billion for BT's 15 per cent would make this task all the more complicated.
Vodafone and Vivendi could attempt to reach an amicable agreement to carve the business between them.
But any purchase would mean Mr Fourtou would be forced to sell other assets of similar value. "Vivendi Universal wants to move to being a European holding company with a basket of stakes in French companies such as Vivendi Environnement, Cegetel and Canal Plus," says Mr Mark Harrington of JP Morgan. "Because of the complexity of the shareholding structure of Cegetel and SFR, I imagine they can delay any decision for two or three months."
But analysts say Vodafone's keenness to gain control of SFR should not be underestimated as the current situation is far from ideal. A controlling stake would enable Vodafone to increase free cashflow at SFR by cutting expenditure through its much stronger buying power.
"Strategically their options are to sell it or increase their stake to gain economic control," says Mr Jamie Mariani, analyst at ABN Amro. "If Vodafone gains control of SFR, it would be perceived a net positive at the right price. But being half-pregnant is not an option."
