Bouygues disappoints

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Bouygues remains an odd mixture. The French conglomerate spans construction, power and transport, and owns France’s smallest mobile phone operator as well as TF1, the television station. So far this year the shares have outperformed the CAC 40 stock market index. But on Wednesday they dropped 6.5 per cent after fourth quarter net income fell short of expectations.

The fall demonstrates some of the disadvantages of Bouygues’ conglomerate structure. If margins in the telecoms business suffer, as they did in the fourth quarter, the whole group is marked down despite strong performance in construction and roadbuilding. Meanwhile, its telecoms and media businesses, traditionally held to be relatively immune from the economic cycle, do not stop investors worrying that Bouygues will suffer from a downturn in the property market.

The arguments for and against the conglomerate structure are well rehearsed. Bouygues’ management argues that its varied activities reduce risk. But the increasing geographical diversification of, say, its construction business, is a more appropriate method to achieve this. Meanwhile, Bouygues Telecom is operating in a mature market, while telecoms valuations are at post-dotcom boom highs. Many a foreign operator would find the mobile phone business a tempting way to gain entry into the French-dominated market.

An extra prod towards divestment may come from the strategic ambitions of Martin Bouygues, chairman and chief executive. He favours closer ties between Alstom, in which Bouygues already holds a 30 per cent stake, and Areva, the state-owned nuclear group. This would require overcoming significant resistance from Areva’s chief executive as well as a seal of approval from Mr Bouygues’ close friend President Nicolas Sarkozy.

Such ambitions would also need financing. But if Bouygues sold Bouygues Telecom to pay for a stake in Areva, it would provide an unusual example of a chief executive’s empire-building pleasing not just himself but investors as well.

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