France’s Iliad looks to Free up US mobile market

Not content with making life miserable for the three incumbent operators in France, French telco Iliad has put in a surprise bid for T-Mobile US. It had been assumed acquisition of T-Mobile US by rival operator Sprint was a foregone conclusion, so Iliad’s 11th hour intervention will potentially ruffle a lot of feathers.

And that’s exactly how Iliad owner Xavier Neil likes it. Iliad’s consumer face – Free – was granted the opportunity to become the fourth French mobile operator a couple of years ago and has since set about competing aggressively to such an extent that the incumbents have complained about how unfair all this new competition is and even considered ganging up to defend themselves.

T-Mobile US has historically positioned itself in a similar way in the US. As the fourth-largest operator it has tended to focus on aggressive price competition in the pre-paid market, and CEO John Legere has made a habit of baiting his larger rivals.

Iliad’s press release confirming its bid opened by making this point, so we asked Phil Kendall, Executive Director at wireless research firm Strategy Analytics if that logic stacks up. As Xavier Neil points out, there are certainly similarities to the disruptive positioning taken by Free and T-Mobile USA, so some sense from Iliad’s perspective in the acquisition,” said Kendall. “Iliad has been circling around the M&A activity in France, though spending its money on the stronger US market does make more sense.”

Fair enough, but Iliad’s offer is for just 56.6% of T-Mobile US at a price of $15 billion, which is equivalent to $33 per share. The Sprint offer is for $40 per share, so it’s hard to see why parent company Deutsche Telekom would accept a lower bid. Iliad is claiming the remaining 43.4% of T-Mobile would suddenly be worth $40.5 per share (as opposed to its current value of around $25) thanks to a presumed “$10 billion of synergies” that it has yet to detail.

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“It sounds like Deutsche Telekom prefer Sprint’s higher bid, even if the US government may see greater competition concerns in that,” said Kendall. “What an Iliad acquisition would do is light a fire under the US wireless market. T-Mobile’s UnCarrier strategy has shifted value propositions to a degree and Iliad could certainly accelerate that process. But much of that, and much of Iliad’s overall valuation of T-Mobile, is based on $10 billion of cost savings, which seem ambitious to say the least.”

Right now it’s hard to see Iliad’s bid prevailing, but it would be rash to underestimate Iliad after what it’s done to the French market. This could just be a preliminary spanner in the works to delay the completion of the Sprint deal while Iliad works on an improved offer, or it could just be a bit of corporate chest beating. It will be interesting to see which.

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