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France’s Iliad challenges SoftBank’s Sprint for control of T-Mobile

Iliad's move may spark bidding war with SoftBank unit Sprint

Reuters

The French telecommunications company Iliad has made a surprise offer for T-Mobile, setting up a potential bidding war with Sprint, the U.S. mobile carrier now controlled by SoftBank.

The approach will further shake up a U.S. media and telecommunications market already in tumult as a series of U.S. cable and cellular operators bid for rivals to cut costs amid slowing growth. The market and its relatively healthy margins remain alluring to some foreign operators like SoftBank and Iliad, however.

Iliad, which has shaken up the French mobile and broadband market in the past decade with its cheap no-frills subscriber plans, bid $15 billion in cash for 56.6 percent of T-Mobile at $33 per share, it said in a statement Thursday.

The Paris-based company said its offer for the fourth-largest U.S. carrier values all of T-Mobile at $36.20 per share, a premium of 42 percent to the pre-announcement share price, once the expected cost savings of $10 billion is taken into account.

That is less than the roughly $40 per share Sprint agreed to pay under the broad terms of an agreement worked out with Deutsche Telekom, T-Mobile’s majority owner. The terms of that proposal, which followed months of talks, would value T-Mobile at nearly $32 billion.

Deutsche Telekom and Sprint declined to comment. A spokesman for SoftBank in Tokyo also declined to comment.

Despite Iliad’s lower offer, three people close to the French company said founder Xavier Niel believes he has a strong card to play because his bid would not face the antitrust scrutiny that confronts Sprint in trying to merge the third- and fourth-biggest U.S. mobile operators.

“SoftBank has been told in many very clear coded words that the Department of Justice and the FCC would probably not approve the acquisition,” said Reed Hundt, a former chairman of the U.S. Federal Communications Commission. “There’s no question to me that the FCC would say ‘bienvenue’ ” (welcome) to the proposed Iliad deal.

The FCC and Justice Department expressed a desire earlier this year to have at least two more network operators competing against AT&T and Verizon.

The T-Mobile offer is Niel’s most audacious attempt at extending his reach beyond France, Monaco and Israel, where he owns part of operator Golan Telecom. Still, his bid to enter the United States mobile market is a long shot, some investors and analysts say.

The French company specializes in broadband and lacks experience in mobile, T-Mobile’s main business, having launched its mobile service only in 2012. It is also unfamiliar with the demands of competing in the United States, with its massive coverage needs and deep-pocketed competition from AT&T and Verizon Communications, the market leaders.

Iliad expects $10 billion in savings from the deal. While it provided no further details, sources familiar with the situation said the French upstart believes it could generate $1.5 billion to $2 billion in additional earnings before interest, taxes, depreciation and amortization (EBITDA) per year by running T-Mobile in a more streamlined manner.

T-Mobile is inefficient and badly managed on the cost front, they argued.

Still, some analysts said the Iliad offer could falter on price alone.

“We are skeptical that T-Mobile and its shareholders, including Deutsche Telekom, will find this bid attractive,” Credit Suisse analysts Joseph Mastrogiovanni and Michael Baresich wrote in a research note. “However, it could put pressure on Sprint to move sooner rather later.

Few doubt the scale of Neil’s ambitions. The entrepreneur, an unknown outsider in France when he started out, has joined the elite, lunching with ministers, starting a tech school and holding part ownership of the influential Le Monde newspaper.

He earned his first fortune from an adult chat and dating service on the Minitel, a rudimentary computer network that predated the Internet in France. He then surfed on a wave of market liberalization in telecoms to create Iliad.

In many ways Niel is similar to Masayoshi Son, the head of SoftBank and his rival for T-Mobile. Both have operated their companies as challengers who cut prices to take on larger rivals with bigger resources.

Niel sees the U.S. market as ripe for the kind of challenge Iliad mounted in France, where its entry into the mobile market in 2012 sent prices down 30 percent and hurt the profits of bigger rivals Orange and SFR, as well as Bouygues. He ranks 133rd on Forbes’ list of billionaires, with a net worth of $9.5 billion.

Son, who is also Sprint’s chairman, has pledged to start a price war in the United States, and he has said industry consolidation would allow Sprint to compete more effectively against Verizon and AT&T. He owns 19.3 percent of SoftBank and is 46th on the Forbes list, with a net worth of $18.4 billion.

T-Mobile would appear well-suited for the role of challenger championed by Niel and Son. Last year, it turned around years of subscriber losses using a strategy that eliminated contracts, restructured plans and set off a race to slash prices across the industry.

Earlier on Thursday, T-Mobile posted a net profit after a year of losses and reported the industry’s largest post-paid phone subscriber additions of the quarter.