Iliad/French telecoms: phone Homer
For investors, the story will get worse before it gets better
The tragedy unfolding at Xavier Niel’s Iliad has taken another twist in the wrong direction. On Tuesday, the French telecoms company said cash flows would be weaker than expected. It may sell mobile assets to help cover the shortfall. Subscriber numbers have been the main casualty in a price war with rival French telecom warriors. There is little sign of a truce.
Battle lines were drawn by Mr Niel in 2012 with the launch of the Free mobile service. Despite the name, it was cheap, not gratis. Market share was grabbed from Patrick Drahi’s SFR and Martin Bouygues’s eponymous network. The tables turned in 2018. SFR and Bouygues Telecom used the same tactics, driving down returns and share prices across the sector. Consolidation now looks the best option. But no side wants to surrender.
An offer by Bouygues Telecom last year for SFR was quickly rejected by Mr Drahi. And Iliad has ruled out joining any tie-ups. That is one reason why shares in the group have underperformed the others so drastically. Over the past five years, its price has fallen almost 60 per cent.
The latest pressures on cash flows will not help. Heavy investments in French fibre and an expensive push into Italy resulted in negative free cash flows of €1bn last year — and an additional €1.5bn in debt. Free cash flow may just turn positive in 2020, at €58m, according to Bloomberg estimates. But that is before Iliad meets its 5G investment obligations, which will send free cash flow negative again in 2022. In Iliad’s favour, its debt level — at almost twice ebitda — is more manageable than at SFR owner Altice’s, where it is four times.
Factors beyond the gods’ control also weigh on the prospects of a face-saving deal. France’s political climate is unconducive. With the gilets jaunes protests now in their 18th week, it is not the moment to announce job losses and higher prices for consumers. Foreign acquirers will have been put off. For investors in Iliad, the story will get worse before it gets better.