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Roger Entner |
We should have seen it coming: Just as we have watched the majority German-owned T-Mobile USA and the majority Japanese-owned Sprint contemplate walking down the aisle in slow motion, a new, dashing suitor has appeared on the stage and who else could it be? It's a French company that thinks it's a better match than the Japanese.
Contradicting domestic critics of the U.S. wireless industry, Iliad called the U.S. wireless market "large and attractive" and that this is a "one-time opportunity to enter the world's-largest telecoms market." The French company certainly seems to be in love with US market. It followed up its offer with cold hard cash. It has offered $15 billion in cash for 56.6% of the company, valuing the company at around $29 billion. Reportedly, SoftBank's offer is valuing the company at around $32 billion.
Deutsche Telekom appears to be unimpressed with Iliad's advances, calling it inadequate as they assume merger synergies of $10 billion over five years. Interesting reaction. The no-nonsense Germans couldn't achieve any synergies from their US subsidiary in the last 14 years, so they took the inclusion of the $10 billion by the French as "sweet nothings." Iliad probably looked at their own EDBITA margins, which are in line with those of Verizon and AT&T, and twice as high as those of T-Mobile USA, and thought they could show these guys a new trick or two. After all, if they have these margins, AT&T and Verizon have these margins, why can't T-Mobile USA have these margins? Sacre bleu!
Maybe Iliad did itself a disservice by pointing towards cost cutting as the source of the $10 billion of synergies. Perhaps it should have looked at increases in revenues while keeping costs under control as the source. T-Mobile USA has handsomely profited from trying new things--some worked, some didn't--so there's a fair chance that Iliad might be able to attract more revenues with market-blowing price reductions.
Deutsche Telekom would be well served to take Iliad's offer seriously, even though it's substantially less than SoftBank's. An Iliad offer is almost certainly going to fly through regulatory approval. It does not present the reduction in headcount that American anti-trust officials are so focused on avoiding. The most serious regulatory condition would probably be the inclusion of a government appointed board member overseeing security along the same lines as what SoftBank had to do when it bought Sprint. By comparison, the not-so-secret potential combination of T-Mobile and Sprint has provoked preemptive regulatory reactions like no other has in living memory, which could be summarized with a "just don't even try" message coming out of Washington. The FCC went so far as to reserve the right to change the bidding rules of the incentive auction if a merger is announced. Just last week, the FCC indicated it may not allow joint bidding arrangement among the largest providers, a direct rebuke of the rumored Sprint-TMUS bidding joint bidding arrangement that would have allowed the two companies to continue negotiating the terms of their marriage even as they participated in the spectrum auction. These are daunting odds.
At a minimum, Deutsche Telekom could use the French advance to make the Japanese suitor a bit more insecure and get a better deal, maybe even negotiate a larger breakup fee. After all, the regulator could think that even if T-Mobile is a damsel in distress that needs rescuing, there are more suitors out there waiting for a chance to save her. If Deutsche Telekom is eager to exit the US market, Iliad's offer of a real bird could be worth more that SoftBank's potential two birds in the bush.
Roger Entner is the Founder and Analyst at Recon Analytics. He received an Honorary Doctor of Science from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner.