PARIS (Reuters) - Vivendi (VIV.PA) has decided "whatever the cost" to pick local cable group Numericable NUME.PA to buy its French telecoms unit SFR, France's industry minister said on Friday just before the seller's board convened to decide on competing bids.
Arnaud Montebourg, said he believed Vivendi "preferred" the Numericable offer over that of conglomerate Bouygues (BOUY.PA) despite the "numerous problems and questions" that he saw with that outcome, such as the amount of debt the newly combined company would have.
Vivendi's board began meeting at 1000 GMT to weigh up the two bids for SFR in a sale that will reshape Europe's third-biggest telecoms market.
A sub-committee of Vivendi's board asked to evaluate the bids decided on Thursday that it preferred Numericable, said two people close to the situation. Led by Henri Lachmann, former chairman and CEO of Schneider Electric, the sub-committee was due to present its view to the whole board at Friday's meeting.
Shares in Numericable were up 4 percent at 27.45 euros by 1112 GMT, when Bouygues' shares were down almost 5 percent at 29.99 euros and Vivendi was down 0.5 percent 19.76 euros.
For Numericable, which owns a cable network that covers two thirds of French households and sells television and broadband, winning SFR would vault it into the big league of French business.
It would also be a win for billionaire entrepreneur Patrick Drahi, who founded the cable group two decades ago, against a later bid from Bouygues, despite the family-controlled firm's intense political lobbying.
Montebourg had backed Bouygues bid because it would reduce the number of players in the French mobile market to three from four and calm what he called "destructive competition" that has sent prices down 20 percent in the past two years.
For Vivendi a sale of SFR would cap a strategic overhaul that began in spring 2012, when veteran chairman Jean-Rene Fourtou declared there would be "no taboo" in re-examining the 160-year-old group's unwieldy holdings that ranged from video games to telecoms in Brazil.
Fourtou became convinced that Vivendi should exit telecoms, to focus more on its media businesses, after seeing the damage wrought by the mobile price war in France which was set off by the arrival of low-cost newcomer Iliad (ILD.PA) in 2012.
Once the group's cash cow, SFR began to drag down Vivendi's results and core operating profit halved from 2011 levels to 1.07 billion euros at the end of 2013.
To revamp Vivendi, Fourtou in July 2013 sold its majority stake in the profitable and growing video game business Activision Blizzard (ATVI.O) to pay down debt, and in November he sold its stake in Maroc Telecom (IAM.CS), raising about 10.4 billion euros in total.
The stage was set to split off SFR into a separate company by July, but that option looked less likely after Numericable and Bouygues swooped in with their takeover bids.
Bouygues, which is now third place in French mobile, wants to buy SFR to shore up its telecom business, which has been hit hard by the arrival of Iliad's Free Mobile service. It agreed to sell its mobile network and some spectrum to Iliad if it won the race for SFR in anticipation of potential objections from competition regulators.
Iliad's shares fell 7 percent as Bouygues' chances faded.
For Numericable, a tie-up with SFR would allow it to become a major player in mobile and grab a large network of stores and sales staff. The combined company would have almost 7 million broadband customers and 21 million mobile customers.
Vivendi's board will debate the merits of both bids on Friday, as well as the spin-off option, and may make a decision by the day's end to open exclusive negotiations with Bouygues or Numericable.
Alternatively, the board, which also includes vice-chairman and second-largest shareholder Vincent Bollore, could choose to take more time to weigh its options.
Bouygues has offered Vivendi 11.3 billion euros ($15.7 billion) in cash and a 43 percent stake in the combined entity, which would be spun off and listen on the stock market if regulatory approval was secured.
A combined Bouygues-SFR would be France's biggest mobile carrier with 32 million customers and 42 percent market share compared with 35 percent for current leader Orange (ORAN.PA).
Numericable on March 5 bid 10.9 billion euros in cash and a 32 percent stake in the new company. Three people close to the situation, but without direct knowledge of the Numericable bid, said on Thursday the company had raised the cash portion of its bid by as much as 850 million euros.
Additional reporting by Maya Nikolaeva and John Irish; Editing by Andrew Callus and Greg Mahlich