Analysis: Iliad's $15B bid for control of T-Mobile puts pressure on SoftBank, Sprint to make a deal

Iliad's surprise $15 billion bid to purchase a majority stake in T-Mobile US (NYSE:TMUS) could put more pressure on Sprint (NYSE: S) and its parent SoftBank to strike a deal sooner than they had expected. Although SoftBank has more financial firepower than Iliad and its rumored bid is seen as stronger than Iliad's, SoftBank could face more regulatory challenges in merging Sprint with T-Mobile, according to financial and industry analysts.

Iliad yesterday confirmed it made a $15 billion offer to T-Mobile parent Deutsche Telekom for 56.6 percent of T-Mobile, at $33 per share. Iliad said it values the remaining 43.4 percent of T-Mobile at $40.5 per share on the basis of $10 billion of synergies to the benefit of T-Mobile shareholders. T-Mobile acknowledged it received the offer but declined to comment beyond that.

DT considers the $33-a-share offer as not competitive and inferior to a separate bid planned by Sprint (NYSE: S) parent SoftBank, an unnamed source familiar with the matter told Bloomberg. SoftBank CEO Masayoshi Son is reportedly working on an offer of about $40 a share for T-Mobile in a deal valued at about $32 billion.

"SoftBank puts the T-Mobile acquisition as its top priority, and its stance on that won't change because of the appearance of a rival," Satoru Kikuchi, an analyst at SMBC Nikko Securities, told Bloomberg.

"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 than later."

The Credit Suisse analysts noted that, given the "meaningful synergies of a combination with Sprint (estimates have ranged from $2.5 billion to $5 billion annually), the ultimate value to T-Mobile shareholders could be greater than $40/share." 

"T-Mobile's strategy has been to be a challenger in the U.S and combining with another U.S carrier should give it the leverage to remain aggressive," they added. "Iliad wouldn't give T-Mobile the scale it's looking for with Sprint. We are skeptical that there are $10 billion of synergies from a combination of T-Mobile and Iliad."

There is also skepticism that Iliad has the financial wherewithal to make a bid that DT would accept. Iliad only has a market value of around $16 billion, compared to T-Mobile's market value of $25 billion before the offer was made. Reuters, citing unnamed sources, reported that Iliad has lined up financing for its bid from banks BNP Paribas and HSBC.

Sprint has not formally made an offer for T-Mobile, and Sprint and SoftBank declined to comment, according to Reuters. Reports this week indicated that a Sprint/T-Mobile deal would likely not be announced before September, as the carriers work to complete their due diligence and prepare a detailed case for U.S. regulators. The DT and T-Mobile boards still see major hurdles to a merger with Sprint that need to be addressed before a deal is announced, Bloomberg reported, citing unnamed sources. Some of the concerns are regulatory and some involve the deal structure.

One of the most compelling aspects of Iliad's bid is that it would not reduce the number of U.S. wireless carriers, and would not arouse the same kind of antitrust concerns and potential pushback from the FCC and Department of Justice that a Sprint/T-Mobile deal would.

"SoftBank has been told in many very clear coded words that the Department of Justice and the FCC would probably not approve the acquisition," Reed Hundt, a former FCC chairman, told Reuters. "There's no question to me that the FCC would say 'bienvenue'" to the proposed Iliad deal.

New Street Research analyst Russell Waller added in a research note: "Although Iliad's US$33 offer is below the rumored soon-to-be made US$40 offer from Sprint, one could argue that a US$33 offer that can close is worth more than a US$40 that probably can't."

"The TMUS board (and DT) will have to decide if the certainty associated with the lower offer is enough to offset the low price; and we do think it is quite a low offer, especially given the other options available, meaning that we think that the board will most likely reject it and wait for more approaches," Waller wrote.

Iliad's offer could be just the opening move in a larger bidding strategy. "While Iliad's offer falls far short of what we think DT would accept, it could have a lasting impact on Sprint's attempt to buy T-Mobile and might be a calling card for others to join them in the bid," BTIG analyst Walter Piecyk wrote in a research note. "One of Sprint's arguments to buy T-Mobile to regulators could have been the need for capital which could only be attracted by greater scale achieved through consolidation. Regulators can now point to the capital that Iliad (and whatever partners they attract) would have invested in the market. Of course, given Iliad's size and the cost to secure that transaction, that would be a faulty view by regulators and we believe that regulators are smarter than investors given them credit for in recognizing that."

Piecyk wrote that the bid  from Iliad "should be a wakeup call to investors to question whether Sprint has convinced DT to sell. It is not logical to let this deal negotiation drag on. We are unclear what additional regulatory benefits can be generated in the next few months, if that is truly what is holding the announcement of this transaction up as many believe."

He added that while media reports have suggested SoftBank will offer $40 per share and a $2 billion breakup free, "we have to wonder if those levels are suitable for DT and if Sprint is even close to signing a deal, itself. Conversely, if Sprint is just a bad communicator but ends up lowering the boom on the industry later this year, DT maybe have lost its own opportunity to liquidate when T-Mobile was filing on all cylinders with Sprint non-existent in the market."

For more:
- see this Re/code article
- see these three different WSJ articles (sub. req.)
- see these two separate Bloomberg articles
- see these two separate Reuters articles
- see this BTIG post (reg. req.)

Related Articles:
France's Iliad makes $15B bid to purchase majority of T-Mobile US
T-Mobile's Legere: We don't need to make a deal to be successful
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Report: Sprint, T-Mobile to form JV to bid in 600 MHz incentive auction
Report: SoftBank, DT reach 'basic agreement' on Sprint/T-Mobile merger
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