Yahoo's Deal To Buy A $200M Stake In Dailymotion From Orange Scuppered By French Government

It looks like lightning has struck on the towers of Dailymotion. Yahoo's bid to take a $200 million majority stake in the video site — known as the 'YouTube of France' — by buying a stake from carrier France Telecom/Orange has been killed by the French government, which decided that it didn't want a U.S. company to take a controlling stake in a French operation, TechCrunch has confirmed with a source close to the situation.

Rumors of problems with the deal have been swirling around for weeks. At first it looked like the issues were because of internal disagreements at Yahoo, according to Business Insider. But a report in the French newspaper Le Monde last week noted that Orange had suspended the deal because of opposition from the French state, which owns 27% of the telecom company.

We have confirmed with someone close to the deal that the latter is indeed the case. Our source said that Arnaud Montebourg, the French Minister of Industrial Renewal, effectively told Orange that it could not go through with the deal. "Dailymotion is considered a marquee company in France's technology industry," the source said. "Hence, Montebourg didn't want to let it go to the Americans. He wanted anchorage to stay in France. It's a shame because all of the growth at Dailymotion is international. It would have been in the best interests of the company. It's stunning, really."

Stéphane Richard, who wants to stay at the head of Orange for another term, didn't want to go through with the deal. In the meantime, Dailymotion won't be able to keep up with the competition — and especially YouTube — if Orange is not ready to invest more capital in Dailymotion.

The end to the Yahoo deal will have a couple of ramifications. For one, Dailymotion will likely now have to raise money from somewhere — France Telecom or the French government, or perhaps from a national business — in order to invest in its platform. Les Echos estimates that the sum will need to be in the region of €50 million ($65 million).

The alternative to that is to seek out another buyer, probably in France, who would be interested in buying most of France Telecom's stake, since the carrier had already made it clear that it intended to divest itself of most of that stake when it took it on earlier this year. It's not clear which company would be a good fit to acquire Dailymotion.

The other is the question of what this might mean for investing in French companies in the future. "The strategic intent was always to find an investor to help them internationally," said the source. "France Telecom and Dailymotion may now go back to other interested parties to instead take a minority stake, but the issue with that is if you're a minority investor and you've seen the French government do this, why would you invest? It's a terrible signal to the marketplace. Who in their right mind would go there now? From a signalling standpoint it's highly concerning."

As a result, venture capital investments could flatten in the coming months. The government sent a bad signal to French investors.

TechCrunch understands that Yahoo's interest in Dailymotion had stretched back from before news first broke of it in March. In fact, from what we understand it was even on the table before France Telecom bought its majority stake in January 2013. It may have even been the confidence of that sale going through that encourages France Telecom to step in when it did.

We have reached out to France Telecom for comment and will update this post as we learn more.