Shares in French construction, telecom and media group Bouygues surged in initial trading on Friday in response to reports that the group was in talks to sell its telephone subsidiary to French giant Orange. The price of Bouygues shares was showing a gain of 3.54 percent to 32.8 euros to lead the French CAC 40 index which was flat. Shares in Orange were up 1.06 percent to 12.4 euros. "Traders are counting on a deal between Orange and Bouygues," said stock trader Yves Marcais at Global Equities. But he warned that anti-trust regulators would not allow a tie-up between the two groups unless they made concessions to ensure competition. Bouygues, which is struggling with operating losses, recently lost out to French group Altice-Numericable in a bidding war for a weakened third French operator SFR, in a local market thrown into a price war by aggressive expansion by low-cost operator Free. This penetration of the market by Free was greatly helped by an agreement with Orange. Under that deal, Orange allowed Free access to a slice of transmission capacity on Orange's infrastructure, and this explains to a large extent how Free has been able to undercut and weaken Bouygues and SFR, to the point that they have both looked for partners. Orange said in a statement that it was looking at opportunities offered by the reorganisation of the French telecoms landscape. The turmoil in the French market comes against a background of deals and consolidation across the European telecoms market. A source close to the Bouygues-Orange talks told AFP late on Thursday that the two groups were talking about a tie-up. This was on the same day as Bouygues Telecom announced a cost-cutting plan to save 300 million euros ($412 million) and warned that jobs were at risk. On Monday, trades unions had warned that the company might shed 1,500 to 2,000 jobs but there was no confirmation of this. - Bouygues telecom reports operating loss - The development of mobile phone services has hit Orange, previously France Telecom, in recent years because the group, formerly the state monopoly, had to adjust to a wave of new technology and attacks by new competitors. The cut-price onslaught by Free has hit all the other operators, particularly in mobile services, causing upheaval at SFR and Bouygues. Late on Thursday, the overall Bouygues group reported that exceptional items had enabled it to report a net profit in the first quarter of the year. Net profit was 285 million euros from a loss of 42 million euros at the same time last year. Bouygues had been pushed into loss last year by the fall in the value of its stake of nearly 30.0 percent in French engineering group Alstom, the target of rival tie-up proposals from US group General Electric and German firm Siemens. The latest Bouygues results included two items of capital gain of 240 million euros and 196 million euros. But excluding these items, the group made a net loss of 56 million euros from sales which rose by 3.0 percent to 6.84 million euros, which was slightly better than analysts had expected. The telecom division reported a current operating loss of 19.0 million euros. The group said that it was working on a restructuring of its telephone activities but that the strategy had not yet been fully worked out. Stock trader Marcais commenting on Friday on the outlook for the telecom business, said that "the best option for Bouygues would be to dispose of the activities which are weighing it down the most."