It's unclear what T-Mobile US (NYSE:TMUS) and parent Deutsche Telekom think of Iliad's $15 billion bid for 56.6 percent of T-Mobile, though early indications are that DT likely thinks the price is too low. However, analysts said the benefits from an Iliad deal are difficult to discern at this point.
On one hand, Iliad has said a merger would result in $10 billion in synergies and an additional $2 billion in EBITDA. Iliad thinks it can hit those targets by running T-Mobile in a more "Iliad-like" way, unnamed sources familiar with the bid told Reuters. Iliad introduced low-cost service in France that led to a price war. It also has a 3G roaming agreement with Orange, which has allowed it to gain coverage cheaply.
However, applying those strategies to T-Mobile likely will be difficult. T-Mobile is already a lean organization and it's unclear if Iliad could strike better deals with tower companies, Recon Analytics analyst (and FierceWireless contributor) Roger Entner told Reuters.
"T-Mobile is not bloated at all. It is cut to the bone," he said, noting that T-Mobile does not have legacy wireline networks like other U.S. carriers. "T-Mobile already has a history of squeezing the vendors. But you can't squeeze water out of a stone," he said. Iliad could boost EBITDA by getting more customers rather than through cost cuts, Entner added.
BTIG analyst Walter Piecyk noted to Reuters that Iliad has "a different model" in France. He said that while Iliad's EBITDA margins are bigger than T-Mobile's, T-Mobile also has an extensive LTE network covering 233 million POPs, and T-Mobile doesn't rely nearly as much on roaming as Iliad does.
In a research report, Strategy Analytics analysts Susan Welsh de Grimaldo and Phil Kendall said that "taking over an established operator, rather than building up a new entrant, would be a different challenge for [Iliad founder Xavier] Niel, but breaking into a market that is still enjoying revenue growth (unlike much of Europe) should be a welcome relief. It would certainly increase Iliad's scale for mobile equipment and services, but Strategy Analytics is skeptical it would unlock the level of synergies Iliad has indicated."
They also noted that for T-Mobile, "the change of ownership has less clear benefits." They added that "a re-invigorated pricing strategy, drawing from the dramatic impacts of [Iliad's] Free or Golan Telecom, would certainly produce results, though would put significant pressure of T-Mobile's $5 billion annualized EBITDA."
Iliad's potential to disrupt the U.S. market as it has done in France and as an investor in Golan Telecom in Israel "does raise the question of how solid the foundations of U.S. wireless growth are," the Strategy Analytics analyst wrote.
T-Mobile's "uncarrier" strategy "has actually delivered postpaid ARPU increases for the operator, ultimately offering flexibility and choice as well as bundled in value added services (international roaming and music in particular) rather than cheaper services, and the potential for a price war on the scale of that seen in France or Israel would have far-reaching impacts," the Strategy Analytics analysts wrote. "It would force operators to completely de-couple service and device plans and drive the market more rapidly towards multi-play convergent propositions. It would also force operators to address the real challenge of developing effective marketing built on segmentation, offering differentiated products targeted at specific market needs by segment, rather than fighting on undifferentiated grounds such as network coverage, speed, pricing for tiered buckets of voice, text and data."
- see this Reuters article
- see this Re/code article
- see this FT article (sub. req.)
- see this Strategy Analytics release
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