Iliad $10 Billion T-Mobile Savings Questioned: Real M&A

Iliad SA thinks it can pull off an acquisition of T-Mobile US Inc. for more than the French company itself is worth, while also cutting $10 billion of costs. Analysts say good luck with that.

Paris-based Iliad has offered $15 billion to buy 57 percent of T-Mobile in a move that may initiate a bidding war with Sprint Corp. and other possible suitors such as Dish Network Corp. That risk, which could require Iliad to take on more debt, sent the stock tumbling 7 percent yesterday, leaving the company with a market value of just $14.9 billion.

Iliad estimates $10 billion of synergies from the deal. Achieving that may be difficult because the French wireless carrier has no overlap with T-Mobile, an entirely U.S. business, and consolidation benefits are limited, according to Bloomberg Intelligence. While it’s possible adding T-Mobile’s 50.5 million customers to Iliad’s 8.6 million could help lower the suitor’s equipment-purchasing costs in France, the benefits likely wouldn’t flow the other direction, said Morningstar Inc.

“The projected synergies seem to me to be about $10 billion too high,” Jonathan Atkin, an analyst at RBC Capital Markets, a unit of Royal Bank of Canada, said in a phone interview. “These companies operate in different territories altogether, in different markets. I don’t see any synergies and certainly not on the scale of $10 billion.”

Scant Savings

Synergies refer to the reduction in costs that comes from integrating two companies and eliminating redundancies, usually through firing employees. They can also refer to additional revenue that will be generated as a result of the combination.

Sprint, controlled by Japan’s SoftBank Corp., would have more synergies with T-Mobile because of the overlap between the two American carriers, said Paul de Sa, a New York-based analyst at Sanford C. Bernstein & Co. They could combine networks, stores and spectrum portfolios, he said.

Adding T-Mobile’s subscribers and more than $24 billion in annual revenue may help boost Iliad’s negotiating power with suppliers in France, according to Michael Hodel of Morningstar. Because Iliad is much smaller though, the deal won’t make much of a difference for T-Mobile in the U.S. where it’s facing off against much bigger and better capitalized competitors AT&T Inc. and Verizon Communications Inc., he said.

“Cross-border mergers like this produce little in the way of opportunities to cut costs,” the analyst wrote in an e-mail. “Iliad’s synergy comments make little sense.”

New Network

It’s possible that Iliad could be counting the savings it would get by buying T-Mobile instead of building its own network in the U.S., said Michael Bowen, a Portland, Oregon-based analyst at Pacific Crest Securities.

“If that’s the case, then yes there are technically cost synergies, to be fair,” Bowen said in a phone interview. “I have no idea how they’re getting to the $10 billion but it could be in the billions of dollars because it takes billions of dollars to build a network.”

Deutsche Telekom AG, T-Mobile’s majority owner, sees Iliad’s proposal as less competitive than Sprint’s planned offer, according to two people familiar with the matter, who asked not to be identified discussing private information.

Even so, there’s a greater chance that Iliad can win U.S. regulatory approval to buy T-Mobile than Sprint can, according to Craig Moffett, an analyst for MoffettNathanson LLC in New York.

Fewer Hurdles

Regulators from the Federal Communications Commission and Department of Justice insist they want to preserve four competitors in the U.S. wireless marketplace, where Sprint is No. 3 and T-Mobile is No. 4. If Iliad succeeds, the U.S. would still be a four-carrier market.

“One of SoftBank’s arguments to the government has been that T-Mobile and Sprint won’t be able to attract capital as stand-alone players,” Moffett said in a phone interview. “The FCC and DOJ will now point to Iliad to demonstrate that that’s simply not true.”

The boards of Deutsche Telekom and T-Mobile still see significant hurdles to a merger with Sprint that need to be addressed before a deal is announced, according to two people familiar with the matter. Any deal with Sprint won’t be announced before September, another person said.

While Iliad may have an easier time obtaining regulatory approval, “it’s probably for the same reason that they don’t get the synergies,” de Sa of Bernstein said. “There’s no competition being eliminated.”

Other Bidders

Iliad’s regulatory advantage means it may not have to top Sprint’s bid to sway T-Mobile parent Deutsche Telekom, said Kevin Smithen, a New York-based analyst at Macquarie Group Ltd. Sprint’s owner SoftBank has been preparing an offer that could value T-Mobile at almost $40 a share, people familiar with the matter said in June.

Iliad’s proposal at least provides a floor and a backup plan for T-Mobile in case regulators reject a deal with Sprint, Richard Prentiss, an analyst at Raymond James Financial Inc., wrote in a report yesterday.

Other bidders may provide alternative options for T-Mobile. While Dish Chairman Charlie Ergen has said that he doesn’t want to get into a bidding war over T-Mobile, Moffett says he shouldn’t be ruled out. The same goes for Carlos Slim’s America Movil SAB, a carrier in Mexico, he said.

“Even though Carlos Slim has suggested that he’s not interested in acquiring a U.S. operator, it’s hard to give up on the idea that he might be a potential acquirer because America Movil owns a huge customer base here in the U.S.,” Moffett said. The company owns TracFone, a U.S. prepaid business.

Unlike Slim, Ergen has shown interest in buying U.S. wireless assets. When SoftBank was buying Sprint last year, Dish made a competing offer, then ultimately backed away.

“Everybody’s been waiting to find out what Charlie Ergen will do,” Moffett said.