French bidder for T-Mobile leaves the experts guessing
08/01/2014 7:35 PM
08/01/2014 7:40 PM
A bold little French company has left the investment world guessing how it could make a takeover of T-Mobile US Inc. work.
Iliad SA, France’s fourth-largest cellular company, jumped ahead of a widely expected Sprint Corp. bid for T-Mobile with its own offer Thursday.
“Iliad’s deal makes very little sense,” Jan Dawson, an analyst at Jackdaw Research in Utah, said Friday.
Iliad offers little obvious benefit to the prospects of T-Mobile, the No. 4 U.S. wireless company.
T-Mobile has touted consolidation in the U.S. wireless market as an important tool for boosting competition. Sprint has championed the argument repeatedly leading up to its own offer.
What they mean is that a Sprint merger with T-Mobile would create a new No. 3 U.S. carrier big enough to take on No. 1 Verizon and No. 2 AT&T. Each of the giants has roughly as many subscribers as T-Mobile and Sprint would have combined.
Having more paying customers makes it easier to build, maintain and pay for an expensive national wireless network. Having half as many subscribers makes it harder to compete financially.
Iliad, with no U.S. operations, would bring no additional U.S. subscribers to T-Mobile or its network.
“They cannot get any economies of scale if they combine the two … which is typically the No. 1 reason that mergers happen,” said Chetan Sharma, a telecommunications industry consultant.
An Iliad combination with T-Mobile might help the two negotiate better terms with network equipment suppliers, but not by much. Iliad’s 8.6 million wireless customers in France amount to a relatively small operation. T-Mobile has 50.5 million subscribers and Sprint 54.6 million.
In its announcement, Iliad cited $10 billion in savings without saying how that could come about.
Iliad offered $15 billion, or $33 a share, for the roughly 57 percent of T-Mobile now owned by Deutsche Telekom, based in Germany. T-Mobile acknowledged it received the offer but hasn’t commented further.
Sprint reportedly has worked out the broad terms of a $32 billion deal to buy T-Mobile at roughly $40 a share, though neither company has commented on a possible deal.
Other aspects of an Iliad acquisition of T-Mobile met skepticism.
A report from Nomura International Securities questioned whether Iliad could take on “a substantial and mature existing operation.” In France, Iliad started from scratch by offering wireless service for about $3 a month. It has shaken the nation’s wireless industry and earned Iliad 13 percent of the wireless subscribers there.
Nomura also wondered how a T-Mobile deal figures into Iliad’s plans at home, where it has made an offer to buy one of France’s larger wireless companies.
Then there’s the idea that a small French company could somehow accomplish what the larger Deutsche Telekom cannot, namely find a reason to own a fourth-place U.S. carrier.
The German company formed T-Mobile by merging two U.S. carriers but has become an eager seller. In 2011, it had a deal to sell its U.S. operation to AT&T for $39 billion, but U.S. regulators blocked it as anti-competitive. Sprint similarly faces a challenge in changing regulators’ minds about a U.S. merger.
Iliad’s bid, however, offers Deutsche Telekom a way to cash out without a fight in Washington. But the $33-a-share bid probably won’t be enough, according to analysts.
Kevin Smithen, an analyst at Maquarie Securities, said Iliad may offer enough to get 10 to 20 percent of T-Mobile’s stock. The sale would give Deutsche Telekom some quick and certain cash and leave both companies in a position to make a profit once Sprint rolls out its bid for all of T-Mobile.
Smithen, in a note to clients, said Iliad could end up with a 50 percent return on its money in about two years.
Like flipping a house, only to the tune of billions of dollars.
“I actually think they could do that,” said Paul de Sa, analyst at Bernstein Research.
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