Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Billionaire Xavier Niel is one of the most aggressive telecoms bosses in Europe, feared for his low-cost model that laid waste to the profits of his French competitors.

Started as a broadband provider in 1999, Iliad surfed the opening of the French market to competition to become a company with a market value of almost 11 billion euros. The stock has trounced the European telecoms index since its IPO in 2004, earning Niel plaudits from investors.

But on one key measure, Iliad has been a long-time laggard: free cash flow generation. The company has delivered positive consolidated free cash flow in only four of the past 12 years.

Cost of Growth
France's Iliad has generated positive free cash flow in only four of the last 12 years
Source: Bloomberg calculations, company reports
Iliad disclosed consolidated FCF for 2010-2015. Bloomberg calculated it for the earlier years based on public filings and the definition provided by the company.

That's markedly different from larger, more mature telecoms companies that typically throw off lots of cash and often use it to pay attractive dividends. Iliad's dividend yield was 0.2 percent last year compared with almost 4 percent for Orange, France's biggest telecommunications company.

The disparity is understandable given Iliad has been in an expansion phase since it entered the French mobile market in 2012. It had to buy spectrum and build a network from scratch, a task that is still not complete.

For now, that's been fine. Shareholders have been rewarded with the appreciation in the stock price. But Iliad's entry into Italy, its first foray outside its home market, could test that model.

Way Ahead
Iliad's shares have far outperformed other European telecoms operators since its public listing because investors rewarded revenue and profit growth
Source: Bloomberg

In Italy, Niel is, as ever, cannily taking advantage of regulation: Iliad will buy spectrum and other assets from Hutchison and VimpelCom's Wind, which both offered the concessions in a bid to get their merger in Italy approved. Brussels is expected to rule on the deal as early as next week.

The Italian adventure will suck up more of Iliad's resources, meaning that cash flow will remain under pressure. In France, Iliad also needs to invest in faster fiber broadband and 4G mobile so as not to fall behind competitors. Capital expenditure is only going up. 

Building Networks
Iliad's expansion into mobile in 2012 has increased its capital expenditures
Source: Bloomberg

To be sure, Iliad's French broadband business is still generating sufficient cash it can afford these investments, as Erhan Gurses, a Bloomberg Intelligence analyst, points out. Iliad's CFO Thomas Reynaud told Bloomberg News on Wednesday the Italian expansion will be funded out of cash flow and debt rather than fresh equity from shareholders.

There is little doubt Iliad will keep adding subscribers in France and later Italy. Revenue is expected to grow by 4 percent to 6 percent annually through 2018, according to data compiled by Bloomberg, while Ebitda is estimated to grow between 10 percent and 12 percent annually. Those are strong numbers compared to more mature telecoms in Europe.

But there are signs that some don't believe as much in Niel's infallibility as they used to. For the past three years, Iliad's share price has been stuck in a range between 170 euros and 235 euros marked by three spikes. Those coincide with each round of (failed) consolidation talks among the French operators.

Niel may be counting on the success of Italy to break out of this holding pattern. But getting the operation off the ground there won't be easy or quick. Investors will have to decide what's more important to them: the promise of eventual growth or free cash generation today.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Leila Abboud in Paris at

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Edward Evans at