JAWS dropped in Paris this afternoon when news broke that Iliad, owner of France’s fourth-biggest telecoms operator, Free, had made a bid to buy T-Mobile US, America’s fourth largest, from Deutsche Telekom.
Iliad is offering about $15 billion in cash for 56.6% of the American firm, or $33 per share. It thinks T-Mobile’s remaining shares will then be worth $40.50 apiece, on the basis that $10 billion-worth of synergies can be wrung out of the deal to the benefit of T-Mobile’s shareholders. That, Iliad’s bean-counters reckon, means that the bid is worth $36.20 per share and values T-Mobile at nearly $30 billion.
Illiad, which has a market capitalisation of €12 billion ($16 billion), is much smaller than its American target, which is worth $25 billion. The firm plans to finance the deal through a combination of borrowing and raising €2 billion in capital. All this, of course, is subject to due diligence.
It is not clear yet that T-Mobile will be keen on the deal, but Iliad certainly is. One of the attractions, the company said in a statement this afternoon, is that its American target has managed to make an impact on its market in much the same way Free has in France—by shaking the place up. In 2012 Free touched off a price war in the once-cozy world of French telecoms that has left its rivals reeling. Iliad’s principal shareholder, Xavier Niel, a free-wheeling entrepreneur (pictured) whom some see as a disruptive bad boy, has gone out of his way to express his personal support for the move on T-Mobile.
If the deal does go ahead, there will be eerie similarities with the so-far fruitless battle in the French market to reduce the number of operators from four to three, which some see as the magic number combining acceptable levels of competition with acceptable levels of profit. An attempt this spring by France’s third-biggest operator, Bouygues Telecom, to take over the country’s second, SFR, came to nothing when the prize was snapped up by a cable operator instead. In America Iliad would be the outsider preventing consolidation.
Iliad’s bid will complicate matters enormously for T-Mobile and Sprint, America’s third-biggest operator. The two firms have been hatching plans for a merger that is said to value T-Mobile at $32 billion. Although a deal has not (yet) been formally announced, its broad terms, including a $2 billion break-up fee payable by Sprint if a merger does not finally take place, have been leaked. John Legere, T-Mobile’s boss, is being lined up to run the merged firm.
Masayoshi Son, the ambitious boss of Japan’s Softbank, which controls Sprint, has been telling anyone who will listen that it and T-Mobile are an ideal fit. He and other Sprint executives claim that by joining forces the two firms would be better able to compete against AT&T and Verizon Wireless, which account for almost three-quarters of all mobile subscribers in America.
The companies argue, among other things, that a merged firm would have the financial muscle to build a much more extensive and robust national wireless network that could compete more effectively with those of the two industry giants. According to Mr Son, the fact that T-Mobile and Sprint are operating independently explains why Americans often pay higher prices for wireless services that are not as fast and reliable as those in other countries such as Japan.
There is certainly plenty of room for improvement. But there are several snags with a proposed domestic merger. For a start, Sprint and T-Mobile are largely focused on big cities at present, so merging does not automatically give them broader geographic coverage. Then there is the fact that regulators had been planning to favour Sprint and T-Mobile in an upcoming auction of wireless spectrum to give them both an opportunity to expand coverage beyond cities at a reasonable price. Hints have been dropped that the terms would be much less favourable for a merged entity.
The Department of Justice has also indicated that it would veto a deal, just like a proposed merger between AT&T and T-Mobile in 2011. At the time regulators argued that anything that eliminated one of the big four national competitors in America’s wireless market would result in a significant loss of competition and harm consumers.
The activities of T-Mobile since then have certainly strengthened that view. Under Mr Legere’s leadership, the firm has continued to be a thorn in the bigger companies’ side, stealing customers with aggressive promotions such as one that offers to pay the cost of terminating a contract with rival carriers. These have cost it money in the short term, which has led to questions about its longer-term viability. Sprint has tried to present itself as the obvious white knight. But now that Paris is calling, its proposed merger is likely to face even stiffer opposition.
