French company offers $15 billion for T-Mobile US, beating Sprint to a bid

07/31/2014 11:06 AM

07/31/2014 9:23 PM

A small French mobile-phone company has jumped in front of Sprint Corp. by making a bid for control of T-Mobile US Inc.

Iliad SA, founded by multibillionaire Xavier Niel, offered $15 billion in cash Thursday for a 56.6 percent stake in T-Mobile, or $33 a share. It also offered itself as a like-minded industry disruptor well suited to team up with T-Mobile.

Iliad also has a big leg up on Sprint, which has been stymied by reluctance among Washington regulators to let two U.S. wireless companies combine. Because Iliad has no U.S. operations, its purchase of T-Mobile would maintain four big U.S. carriers, a count that regulators prefer.

That distinction is one reason the French company offered $7 a share less than the purported offer that Sprint, backed by its Tokyo-based parent company SoftBank Corp., plans to make.

Sprint and SoftBank reportedly have worked out the broad terms on a $32 billion deal that equals about $40 a share for all of T-Mobile. The companies have not confirmed the deal.

T-Mobile confirmed the offer from Iliad in a brief public filing that also said executives would not comment. Sprint and SoftBank each declined to comment.

Shares in T-Mobile jumped $2, or 6.5 percent, and finished Thursday at $32.94. Sprint shares fell 41 cents, or 5.3 percent, to $7.35.

T-Mobile US’s majority owner, Germany-based Deutsche Telekom, is evaluating the bids. In 2011, the company had agreed to sell T-Mobile to AT&T, only to be stopped by Washington regulators.

Since then, T-Mobile has introduced many changes to the wireless industry that have been copied by rivals, such as no-contract service, installment purchases of cellphones and paying the early termination fees on contracts of customers who switch from another carrier.

The U.S. Department of Justice and the Federal Communications Commission see T-Mobile as a U.S. industry maverick and have broadly suggested that a merger with Sprint would face tough scrutiny.

Investors and the wireless industry have been waiting patiently for Sprint’s bid, which recent reports said may not come until September. Iliad’s offer may hasten the process.

“I think this stirs the pot pretty well,” said Berge Ayvazian, an industry consultant with UBM Tech. “It forces SoftBank and Sprint to get off the dime.”

Many outsiders were giving Iliad little chance of winning a bidding war with the much larger combination of Sprint and SoftBank.

“I don’t think they really can,” said Paul de Sa, with Bernstein Research. “The only thing they have is no regulatory risk.”

Iliad’s offer for T-Mobile amounts to a little fish gobbling up a big one. It has 14.3 million subscribers, only 8.6 million of which are wireless customers. T-Mobile has 50.5 million wireless subscribers.

Sprint has 54.6 million subscribers, and SoftBank is a conglomerate whose operations include Japan’s third-largest wireless company.

A merger with T-Mobile also would allow Sprint to cut $3 billion or more a year from the two companies’ total costs as they eliminate duplicate jobs and combine network resources.

Iliad’s announcement said its deal would create $10 billion worth of this kind of synergy, to the benefit of T-Mobile’s other shareholders. It didn’t offer the sources of those savings, which were not apparent to others.

“Iliad is about a third of the size of T-Mobile US, and we don’t think there would be synergies from the deal,” Jonathan Chaplin, an analyst at New Street Research, said in a note. “It would be tough to finance without Xavier Niel relinquishing control. Sprint and anyone else with synergies should be able to outbid them.”

Niel, whose holdings include the rights to the song “My Way,” is a largely self-made businessman worth $9.5 billion, according to Forbes’ ranking of the world’s richest.

In an interview last August with Bloomberg Businessweek, he described starting his first Internet service company in a small Paris apartment.

Niel also started a free computer programming school to provide high school dropouts a potential career. It’s called 42, which he told Bloomberg Businessweek came from the book “The Hitchhiker’s Guide to the Galaxy.” The science fiction book includes the discovery that the answer to life, the universe and everything is 42.

Ayvazian said it would be a mistake to shrug off Iliad’s offer. The company has been an aggressive entrant in France’s cellular business.

The company began by building a vast network of WiFi hotspots, or open connections to the Internet common at Starbucks and other places. It offered the access for free.

Then, two years ago, Iliad layered a low-cost wireless service on top of that, Ayvazian said, relying on its own limited network and buying access to the networks of other carriers in France.

Niel introduced Iliad’s Free Mobile with a monthly fee that was less than half of what larger competitors were charging.

The payoff was a 13 percent share of the wireless market and intense pressure on France’s major wireless companies to cut prices.

During the first quarter, Iliad said it added 595,000 mobile subscribers or 80 percent of all customer growth in the industry.

Iliad’s offer also could trigger others to consider a bid for T-Mobile.

Dish Network Corp., which battled SoftBank last year for control of Sprint, is one candidate, said Donna Jaegers, an analyst at D.A. Davidson & Co.

“That makes it a horse race for Sprint,” Jaegers said of the start of bidding.

T-Mobile has become a more attractive target with recent gains in subscribers, which continued through June. The company said Thursday morning that it added 1.7 million wireless subscribers in the second quarter, during which it earned $391 million for its first quarterly profit in a year.

Iliad’s announcement said it made the offer to T-Mobile’s board but there was no certainty it would be accepted. The cash portion of its offer would be financed with debt and equity.

Iliad said it had the support of international banks to fund the offer.

Although Iliad is offering $33 a share for Deutsche Telekom’s stake in T-Mobile, it said the proposal values the remaining shares at $40.50 each based on the $10 billion in potential savings to be shared between the companies.

Earlier this year, Iliad made an informal offer of as much as $6.7 billion for its French competitor Bouygues Telecom, which is seeking a higher bid, according to people familiar with the matter. Paris-based Iliad had sought the deal to get access to Bouygues’s network since it has yet to build its own in full since entering the market in 2012.

Bloomberg News contributed to this report.

To reach Mark Davis, call 816-234-4372 or send email to mdavis@kcstar.com. Follow him on Facebook and Twitter @mdkcstar.

Comparing competitors

U.S. wireless giants Verizon and AT&T each have more than 115 million wireless subscribers. Here’s how the companies seeking a merger stack up.

Sprint Corp.

T-Mobile

Iliad Group

Headquarters

Overland Park

Bellevue, Wash.

Paris

Subscribers

54.6 million

50.5 million

14.3 million

Quarterly revenues

$8.8 billion

$7.2 billion

$1.3 billion

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