Bouygues: engineering reverse

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So that’s what comes of helping out. Eight years ago, Bouygues bought the French state’s 21 per cent stake in engineering group Alstom for €2bn. This deal allowed the government, which had come to Alstom’s rescue two years earlier, to exit with a paper profit and meet EU commitments. On Monday, however, the Paris-based group announced that it would be writing down its Alstom holding (now just over 29 per cent) by a third to €3bn, to reflect tough trading at the turbine maker and deteriorating cash flow there.

True, this is a non-cash charge so, at one level, Bouygues investors don’t need to worry too much: Bouygues shares were flat on the news. Even so, if the perils of combining a construction-to-telecoms group with a non-controlling interest in a large engineering group needed amplification, this screams out that danger loud and clear. Monday’s announcement, after all, may not end the problems. While Alstom is trying to cut costs and has flagged asset sales to address balance sheet weakness, this response is, at best, a work in progress. And even at the written-down level, the Alstom stake accounts for a fifth of Bouygues’ enterprise value. The new €3bn valuation put on the holding, moreover, remains 50 per cent higher than its stock market worth.

The pity is that this clouds signs of improvement at Bouygues itself, which is due to release 2013 earnings next week. Order intake on its construction side was decent in the first nine months of 2013 and operating profits there improved. The telecoms unit, by contrast, was still plagued by falling sales and earnings as competition continued to bite. But France’s mobile market did improve a tad as 2013 ended: there were no new price cuts. And consolidation – between Numericable and SFR, perhaps – may also be in sight. Still, on 13 times estimated 2014 earnings, Bouygues is no steal given the risks.

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