One of the shocks to us around the Iliad bidding for T-Mobile was the way T-Mobile executives came out and put a price of $35 to $40 a share on the deal, which is to take the mid-point means that if Iliad can top its bid by around $2 billion if you take the final price of $37.50 per share, then it can acquire T-Mobile US. That would mean that paying $17 billion for 56.6% of the company.
While Iliad sits calmly and makes statements like it doesn’t want to do a rights issue for more than $2 billion and its cash in hand sits at just €230 million, this means that it has to persuade banks, private equity groups and probably at least one trade partner, in order to get the deal done. It has more or less admitted to that in saying that it is talking to more potential partners, some of them from the US.
We put forward the idea of Comcast and the US cable companies using this as a big leg up into cellular, which they are in a perfect position to do right now with their dominance of the US WiFi signal for offload, and our partner publication Wireless Watch has put the idea of the partner being Google, which is just as reasonable.
The key for us is that in order to replicate what it has done in the France, Iliad, operating as the brand “Free,” needs access to a big chunk of fiber and WiFi. Fiber it can get from Google and it can get both from cable. But the two sides are unlikely to mix. Google could, as in the deal it initially struck with Clearwire, just put some cash into an idea that it likes – and then sell up once the direction has been set and simply make some money, and then Iliad could continue partnering cable. But if it wanted to go it alone and ensure that there was as single cellular operator in the US that had Google’s interests at heart, it would need to take far more control of the project than we suspect Iliad would be prepared to give.
Given the single-mindedness with which Iliad has pursued its own unique strategy in France, we don’t think Google would sit as a partner that it was comfortable with long term. But the same can be said for US cable, or even Comcast-Time Warner Cable separately. Eventually just who was in charge of that part of the assets would come back to haunt Iliad and the cable community would want the lion’s share of ownership. But if it is looking for just $2 billion more there should surely be players in the private equity community that can see the sense in backing Free.
After-all LightSquared managed to rustle up some $2.9 billion from Harbinger Capital Partners and another $2.3 billion in debt and equity financing, and its spectrum was suspect. Dish has been mentioned, and potentially it has a fit, taking T-Mobile US into US held video assets as well – something that we know is on the mind of Verizon and AT&T who have declared interests in LTE Broadcast for video distribution.
But the truth is that all the usual suspects don’t quite make sense here and the chances are that Iliad has to embark on a slightly different strategy in the US, due to its lack of ownership of a major portion of WiFi. It might trade for its WiFi capacity, starting with mostly free US WiFi sites, or perhaps it has something completely new up its sleeve.
Right now Iliad is worth a little over $9 billion on the stock market and it has been building unbundled loop connections for a decade using ADSL, then VDSL and finally installing fiber.
It managed to upset the French cellular system by getting first a 3G, then a 4G license in France, having been kept out of it for a decade, by Orange, SFR and Bouygues. When it finally got spectrum, it built out a minimal amount of base stations and roamed with France Telecom Orange for the rest of its cellular connections and offloaded the rest to WiFi.
With those 5 million home broadband lines Iliad managed to gain 9 million cellular customers in a market that has around 68 million mobile users, some 13%.
To do exactly the same in the US it would need 50 million broadband lines which terminated in WiFi, and then presumably in two years it could take 13% of a 350 million connection market, or some 39 million new customers. If you add that to the 50.5 million T-Mobile has today, that would create a third placed cellular operator with some 90 million subscribers and if you pro-rated that with its market capital, the $17 billion it may pay now to gain a foothold in the US, would probably lead to a market cap closer to $100 billion (when compared to AT&T’s at $181 billion and Verizon at $201 billion).
But to do that it would have to capture about 39 million customers in two years, at the rate of 5 million a quarter. And to do that the likely profile would be that the remaining operators would be forced to acquire as few as 1 million each quarter between them, and all the new customers in the market would be hovered up by the newcomer, which is what has happened in France where it has taken 65% of all new subs this quarter.
Of course we have to bear in mind that it could not have the kind of fixed line support that Verizon and AT&T has, nor the enterprise business, but both of these companies make most of their profits from cellular, so it would get that kind of market capitalization if it managed to annex an extra 13% of the US market.
But what specifically will it do to achieve that. In France it introduced, on day one, unlimited calls and three gigabytes of data for around $26 a month. But that was three years ago. It is more likely to offer that kind of price now with twice as much data.
You have to understand that Iliad is a kind of gambler. A company run by T-Mobile executives believes that stealing that many customers is foolhardy if it fills up your network and uses up all the capacity. Iliad thinks that if it throws off enough cash, you can pile it back into the network and worry about it later.
It is a mentality difference.
The effect of that launch in France was described by rivals as a tsunami. It changed all previous financial practice in cellular at a stroke. Rivals had to slash costs just to stave off mass desertions. SFR was known to cut €500 million in expenses and all of them immediately looked at RAN sharing deals. Orange went for €600m in cost cuts. Had they not done this, and taken their pricing to the floor, the feeling is they would have lost even more customers.
All of this was done installing just 3,122 base stations on 3G (the others have more 4G base stations than that each), and now the company has installed just 600 4G base stations, about 20% of its rivals. So the bulk of the traffic is roaming with rivals and over WiFi.
The 4G pricing for Iliad in France gives you some idea. Its rivals who had far superior 4G networks offered prices of around $35 a month with 3GB of data included, while Iliad has two prices. For $26 if you are not a broadband customer and $21 if you are, you get unlimited SMS, MMS calls to landlines in 100 countries, and 20GB of 4G data and there is no contract. For roughly $2.50 a month you can get 120 minutes of talk and a continued price of $0.06 cents a minute, and unlimited SMS and MMS, and 50 MB of data. If you want a phone you can get it for a one off payment, paid monthly over a few years, or use an old phone you already have.
If Iliad could manage that, then it would easily take out all the US competition. Currently they are involved in what they laughingly call a price war with unlimited data plans alone (forget voice and SMS) costing $60 at Sprint, $80 at Verizon and not even on offer at AT&T. If Iliad gets a grip their profits will be steamrollered.
The only imponderable here is the complete lack of WiFi to offload to, but we wouldn’t put it past Iliad to already have a source of WiFi lined up that will at least trigger this process in some part of the country and a single deal with a single cable company or Google, could at least start this process.