Iliad Entry Could Complicate T-Mobile US And Sprint Merger

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Iliad Entry Could Complicate T-Mobile US And Sprint Merger

Iliad, France’s fourth-biggest mobile company, said Thursday that it made a $15 billion bid for a controlling stake in T-Mobile USA, Inc. (TMUS), disrupting its long-rumored merger with Sprint Nextel Corporation (NYSE:S).

Several analysts, including those from Credit Suisse, are skeptical that T-Mobile USA, Inc. (TMUS) and its shareholders, especially Deutsche Telekom, will find the bid from the upstart French mobile telecoms provider attractive.

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$15 billion offer

Iliad, SA said late Thursday it would offer $15 billion for a 56.6% stake in T-Mobile USA, Inc. (TMUS), and it valued the remaining stake in T-Mobile US at $40.50 a share. The French mobile telecom provider headed by maverick entrepreneur Xavier Niel thus stole a march on Sprint Nextel Corporation (NYSE:S)’s majority owner Softbank Corp, which has failed to present a formal offer for the company despite months of leaks and rumors suggesting it intended to.

As reported earlier, Sprint Nextel Corporation (NYSE:S) was said to be nearing an agreement to acquire T-Mobile USA, Inc. (TMUS) that could value the wireless carrier at almost $40 a share. However, U.S. Department of Justice officials sounded a warning that Sprint Corporation’s acquisition of T-Mobile US Inc. would meet with “intense scrutiny” and regulatory difficulties. According to people familiar with the developments, Deutsche Telecom, which owns about 67% of T-Mobile US Inc. was seeking at least $40 a share, while Softbank Corp was willing to pay in the upper $30s and the two sides have bridged the gap.

Analysts skeptical

T-Mobile USA, Inc. (TMUS) is roughly 60% bigger than Iliad in market value. The French company ranks fourth in France behind Orange, SFR and Bouygues. Iliad has a market value of $15.9 billion and reported €1 billion in revenue during the first quarter of 2014. T-Mobile US Inc. has a market capitalization of $25.3 billion and it touched almost $7.2 billion revenue during the second quarter of the year. Iliad’s latest approach could complicate the merger effort of T-Mobile US and Sprint Nextel Corporation (NYSE:S) as they seek to create a strong No. 3 competitor to AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ).

John C. Hodulick and team at UBS in their research note dated July 31, 2014 point out Iliad has disrupted the market in France having gained 13% in just 2.5 years with its attractive plans. Citing press reports, the analysts point out that the DT board has rejected the latest offer from Iliad believing it be less attractive than the expected bid from Sprint Nextel Corporation (NYSE:S).

The analysts also note the shareholder agreement suggests DT is prohibited from selling any of its 67% stake in TMo that would result in the entity owning over 30% of TMo unless the entity offers to acquire 100% of the shares on the same terms.

The UBS analysts remain skeptical of Iliad’s ability to put together a successful bid for T-Mobile USA, Inc. (TMUS) given its size. They believe the latest announcement would be most negative to Sprint Nextel Corporation (NYSE:S), given expectations for its deal with TMo. The analysts believe the main beneficiary would be the U.S. tower companies as they continue to benefit from strong demand from wireless coverage and capacity and the maintenance of a four-player market.

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