France's four big phone companies are poised to become three as Orange prepares to take over and break up Bouygues Telecom.
But as talks drag on over what parts of the combined business will have to be sold to placate antitrust regulators, all the protagonists have taken to spinning that their company is the one that least needs the transaction.
For one, billionaire Xavier Niel's Iliad, that argument rings particularly hollow.
Iliad, which is now the third-biggest operator with 24 percent of the broadband market and 17 percent of mobile, stands to benefit the most from the consolidation of France's telecommunications industry. The low-cost upstart also has the most to lose if the whole thing falls apart.
That's because Iliad will gain access to a much larger portfolio of mobile towers and radio spectrum Bouygues will have to sell to assuage competition regulators.
Without a deal, it will be outgunned on network investments as larger rivals Orange and Numericable up spending on fiber broadband and 4G. The two are set to spend more than 5 billion euros ($5.5 billion) in the next year alone, compared with Iliad's prediction of a little more than 1.2 billion euros.
Exactly how the acquisition affects Iliad's long-term profitability will depend on the price Niel is able to negotiate with Orange CEO Stephane Richard, and what batches of spectrum he scoops up.
The new Iliad would be a turbo-charged competitor for Orange and Numericable-SFR: it would have a much better network that would allow it to be more aggressive in winning clients. Now it has about 6,000 mobile towers of its own and rents capacity from Orange to carry traffic where it doesn't have its own. A deal would add thousands more towers overnight, allowing it to pay less in rent and boost free cash flow over time.
Iliad has so far been a rare beast in the European telecommunications industry -- a growth company whose revenue and profit have increased, fueled by its expansion into mobile since 2012.
The company said on Thursday annual sales climbed 5.9 percent to 4.4 billion euros, while Ebitda rose 16 percent to 1.49 billion euros. The Ebitda margin, a measure of profitability, climbed 3 percentage points to 33.8 percent. The company is still aiming to achieve a 25 percent share in mobile and broadband in the long-term and a 40 percent margin.
But there are doubts about whether those goals are realistic as the existing business model runs out of steam. Ebitda growth is forecast to slow in the coming years, as this chart shows.
Iliad will surely be even more ambitious once it has more spectrum and towers, and can shift its focus to higher-end customers. Today, Iliad has less mobile spectrum than peers, about 19 percent of the total compared with 33 percent for Orange, according to Macquarie.
It is also particularly underweight in the so-called golden frequencies, which carry mobile signals the furthest and allow operators to put up fewer towers and keep costs lower. Iliad paid 933 million euros for some of these 4G mobile broadband frequencies last December and will begin activating them this year.
So how much money will Iliad have to spend? When Bouygues tried and failed to buy SFR in March 2014, Iliad agreed to pay 1.8 billion euros for the 15,000 towers and some mobile frequencies Bouygues would have had to sell to win antitrust approval for the purchase. (In the event, Drahi's Numericable bought SFR.) This time, Iliad may have to offer more than 2 billion euros -- but would get some customers and stores in addition.
That's still affordable for Iliad, which says it would fund any purchase with debt. It's one of the least indebted telecommunications companies in Europe: net debt stands at 1.19 billion euros, less than a year's Ebitda. By contrast, most European peers' net debt amounts to two year's profit.
Stephane Richard called Iliad out recently for driving too hard a bargain in the talks, criticizing it for trying to have its cake and eat it too. The risk for Niel is he overplays his -- already very strong -- hand.
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