By The discussions bring Orange, the former France Telecom monopoly, into the frame for the first time in moves to consolidate the industry, but other industry sources wondered how far talks could go between the biggest and third-biggest mobile service providers, given the likely antitrust hurdles.
They said the manoeuvering could be aimed instead at raising the potential price of Bouygues Telecom for rival Iliad, whose upstart 'Free' mobile service sparked a price war two years ago.
Stephane Richard, CEO of 27 percent state-owned Orange, has discussed the matter with Martin Bouygues, his counterpart at Bouygues, the sources said.
A deal with Orange would value Bouygues Telecom at more than 6 billion euros (4.8 billion pounds), and by selling in return for shares, Bouygues and its shareholder JCDecaux could end up holding close to 10 percent of Orange, one of the sources said.
Bouygues Telecom and its conglomerate parent Bouygues were the losers last month in a battle to buy Vivendi's SFR, the country's second biggest mobile network operator behind Orange.
Asked in a televison interview about reports of the talks, French Economy Minister Arnaud Montebourg said "they exist" but that there were "multiple discussions" taking place in the industry. Orange also said in a statement that it was "exploring opportunities" and favoured consolidation.
Montebourg has repeatedly said the government wants to reduce to three from four the number of telecom players as tough competition in the sector is hurting jobs and investment in high-speed broadband. "We need to rebuild a telecoms sector that is in ruins," Montebourg said in his interview with BFMTV on Friday.
Since failing to push through Bouygues' plan to buy SFR, bought instead from Vivendi by cable firm Numericable and thereby leaving the number of network operators at four, Montebourg has also said Bouygues Telecom should explore tie-ups with other operators.
HOW WILL IT END?
"It's clear the sector will need to move one way or another, either via tie-ups or by network-sharing deals. But will that involve Orange, Free, Numericable?" said one industry source with knowledge of the wide-ranging discussions.
"Anyone who can tell us how this will all end is very clever".
Shares in Bouygues were up 3.4 percent on Friday, while Iliad's stock climbed 5.5 percent and shares in Orange were up 0.6 percent.
"Bouygues wants to create an auction here. The government, via Orange, wants to show it has a hand in this, and Iliad wants to get hold of Bouygues Telecom's network, said a Paris-based trader.
Bouygues executives said during a presentation of the group's first-quarter results on Thursday that it was working on further restructuring at its telecoms unit and exploring potential tie-ups in the industry but its focus was on keeping it as an independent business.
"Bouygues Telecom's priority today is to adapt to the evolution of the market, and to pursue and finalise its standalone strategy," Bouygues' chief financial officer Philippe Marien said in a conference call.
"Afterwards, all scenarios are on the table ... All telecom operators ... are considering all possibilities and all opportunities ... Today, we are very focused on putting in place our standalone plan."
But in an interview with the Financial Times this week Orange's chief executive said Bouygues Telecom was "facing a real challenge" and would have to restructure the company massively.
(Additional reporting by Natalie Huet, Leigh Thomas and Alexandre Boksenbaum-Granier; Writing by Andrew Callus; Editing by Mark Potter and Greg Mahlich)
By Gwénaëlle Barzic and Sophie Sassard
