ANY ordinary person who has spent some time in France will have been puzzled by the unpredictable internet and mobile connections in a country where services are by and large among the world’s best. It is not only in remote rural regions that you have to run up a hill waving your mobile to send a text. The Left Bank in Paris can also feel like the Pyrenees. This may now change, thanks to a gloves-off battle for the country’s second-biggest telecoms operator. Since the beginning of 2012, when a new competitor, Iliad Group’s Free, crashed in with super-low prices and soon snatched more than 10% of the market (see chart), revenues of the three incumbent operators have tumbled. At SFR, the second-biggest, the price of the average mobile contract these days is €24 ($33) a month, €10 lower than three years ago. In recent days Orange, the market leader, and Bouygues Telecom, the number three, have both reported lower sales and gross profits in 2013.

This is a problem not only for shareholders, but also for the country. Even before Free sparked off massive price reductions, French telecoms companies were skimping on investment in their networks. And at current prices they are not making enough money to remedy matters. France has fallen behind the likes of Switzerland, Belgium and Portugal in the quality of its networks and broadband penetration, says Carlos Winzer, a telecoms analyst at Moody’s, a credit-ratings agency.

Like other countries, France is coming around to the notion that consolidation may be more important than raw price competition. In 2013 François Hollande, the president, refined a campaign pledge he had made in 2012 to extend high-speed internet across all of France within ten years. The private sector is supposed to meet around half of the cost, which he put at €20 billion. Many customers, the thinking goes, are prepared to pay more for better service if it is available. Orange reported this week that 63% of new subscribers in the last quarter of 2013 had chosen premium products.

SFR, which offers both mobile and fixed-line services, is the operator most clearly in play. It belongs to Vivendi, a turbulently managed media and telecoms group. Vivendi made it clear some time ago that it wanted to be rid of SFR in order to concentrate on content. Talks with both Numericable, France’s biggest cable operator and backed by Patrick Drahi, a Franco-Israeli entrepreneur, and Free came to nothing. So Vivendi said it would float SFR in June 2014. Then, on March 5th, two offers emerged, from Numericable and from Bouygues Telecom, part of Bouygues Group, a conglomerate.

Numericable is offering Vivendi €11 billion in cash and 32% of the new company, which is to be floated on the stock exchange. Bouygues will give €10.5 billion cash and 46% of the new entity. After various adjustments for cost savings from synergies, asset disposals by the would-be acquirers and possible capital-raising, both bids value the company at something like €19 billion. Both bidders are counting on big efficiency savings. Both say they will maintain employment. Both promise to invest: Bouygues has committed itself to doubling investment in fibre optics to €400m a year; Numericable is pledging €200m-300m. And both bidders, smaller than their target, rely on bank debt to finance the acquisition.

Consolidation in the sector has much to recommend it, not least for Orange and for Free, whose share prices rose even more than that of Bouygues the following day. But both offers raise some big questions.

The first is whether either new entity would have the financial freedom to live up to the investment pledges. Numericable is already carrying a lot of debt. It went public in late 2013 and still counts Altice, a holding company based in Luxembourg, and private-equity investors Carlyle and Cinven as its biggest shareholders. The Bouygues Group has been more conservatively managed, although Moody’s downgraded it a notch on March 5th, citing telecoms as the reason. The agency warned that a large debt-financed acquisition could put further downward pressure on the company’s rating, though “we would have to look not only at the additional debt but at the additional cash, EBITDA [a measure of earnings] and cashflow such a deal might bring,” says Marie Fischer-Sabatie, a senior analyst at Moody’s.

A second question is whether the cost savings both bidders have identified can possibly be achieved without significant lay-offs. This is a subject on which the government will be sensitive, however keen it is on extending high-speed internet access.

The lobbying is already intense. Martin Bouygues, boss of Bouygues Group and known to be a chum of the previous president, Nicolas Sarkozy, popped into the Elysée to nobble his successor last week just after Mr Hollande returned from Nigeria and just before he flew off to Central Africa, according to an uncontradicted report in the Journal de Dimanche, a weekly. At the other end of town, Arnaud Montebourg, the industry minister, and Fleur Pellerin, the minister for the digital economy, are similarly under siege. Numericable is outside the charmed circle of French blue-chip companies and lacks their easy access but it is learning fast.

A third barrier is the French competition authorities. The Bouygues deal could create an entity with 32m subscribers, giving it about half the market in mobile telephony and pushing Orange into second place. Both bidders consulted the Autorité de la Concurrence before offering for SFR, and it seems that there was no objection in principle. Bouygues is prepared to cede assets worth up to €3 billion (which will also reduce its debt burden); a lot of them could go to Free. But there is bound to be a long official enquiry into the matter, delaying resolution by up to a year. The issues are less stark in Numericable’s case, but again the competition watchdogs will take time to pronounce.

The final barrier is rooted in the incestuous world of France’s big family-run businesses. In the end it is Vivendi that will choose whether it wants either bid or prefers to float SFR. Vivendi’s main shareholder, and chairman of its board, is Vincent Bolloré, a financial swashbuckler whose Bolloré Group is involved in sectors ranging from paper to electric cars and buses to the media. Mr Bolloré and Mr Bouygues go back, and not happily.

In 1997 Mr Bolloré took a stake in Bouygues Group. Initial matiness soon gave way to knives in the back. Mr Bouygues, no pushover himself, blocked Mr Bolloré’s path to greater control and the latter stood down, making a healthy profit on the sale of his stake. Asked this week whether he could now work productively with a man whom he publicly called a thug 15 years ago, Mr Bouygues said that their differences have been resolved. In 2006 Mr Bolloré’s son married Mr Bouygues’s niece. But it is doubtful whether either views the other with particular warmth, and it is just possible that on such considerations the resolution of the matter could hang.

(Photo credit: AFP)