Investor frustration set to boil over at France’s Iliad
A falling share price, insider trading conviction and controversial pay scheme add to annoyance
When Iliad holds its first investor day for years on Tuesday, the upstart of the French telecom sector will have its work cut out to rebuild trust with shareholders.
It is grappling with a 43 per cent drop in its share price in the past year, a recent insider trading conviction for its chairman, and criticism of an “opaque” executive pay scheme.
Keval Patel, who works in specialist sales at Citi, wrote in a note to clients last week that some Iliad shareholders feel a “deep distrust of the management team” and a sense of “management hubris.” He said: “Investor perception is that the management team comes across as arrogant and unwilling to accept they have made mistakes.”
Founded by telecoms billionaire Xavier Niel, one of France’s richest men, Iliad’s Free Mobile burst on to the scene in France in 2012. For years it was a darling of investors, trading at a premium to its peers as its low-cost mobile offering broke up the country’s telecoms oligopoly and grew to a fifth of the market.
Over the past two years this all changed. Iliad’s share price reached an eight-year low in February and is down by a fifth since the start of the year, reflecting commercial challenges in France, concerns about its ability to generate cash, and lack of visibility over a foray into Italy.
Since Iliad’s share price started falling, a controversial pay scheme for some senior executives has been attracting greater scrutiny.
In 2010 and 2011, Free Mobile, an unlisted subsidiary of Iliad that represents the mobile network operator, set up a share grant plan involving shares representing up to 5 per cent of its share capital. Twenty-three employees and executives, including chief executive Thomas Reynaud and chairman Maxime Lombardini, were granted shares representing 5 per cent of Free Mobile’s share capital.
Under the terms of the plan, they have an option to receive their entitlements in either cash or Iliad shares, with the price determined by an “independent valuer”. Analysts say this unusual scheme means the interests of these executives are not aligned with those of Iliad’s shareholders, because their pay is linked to the performance of Free Mobile rather than to that of the entire listed company in which investors buy shares.
Iliad does not say exactly how the independent valuation is carried out. However, a spokesperson for the group said it believes that the long vesting period of the remuneration scheme should reassure investors.
Last year Iliad lost about 250,000 mobile subscribers and 93,000 broadband clients in France, and total revenue in France fell 1.9 per cent to €4.8bn. Overall, the group’s profit from ordinary activities dropped by a fifth to €690m in 2018.
Meanwhile, under the management incentive scheme, the board authorised €53.2m in entitlements to be distributed among five executives for the 2018 financial year, according to a statutory auditors’ report published on Iliad’s website. The five were Mr Reynaud, Mr Lombardini and Iliad’s three deputy CEOs.
“The remuneration structure is opaque,” said a shareholder. “You have a senior management team and you don’t know how much money they’re actually making.”
A report published by corporate governance group Proxinvest last week, ahead of Iliad’s shareholder meeting on May 21, recommended investors oppose resolutions to approve the 2018 pay of the five Iliad executives who are part of the Free Mobile incentive scheme.
The report cited concerns about the independent valuer’s role, noting that “the lack of information that would allow shareholders to estimate whether valuation is fair or not is not acceptable.” Proxinvest recommended that investors approve Mr Niel’s pay.
Meanwhile, adding to the pressure, last week Mr Lombardini was fined €600,000 by the French financial watchdog for selling Iliad shares in July 2014, weeks before their price fell sharply when it announced a failed takeover approach for T-Mobile USA. Iliad was fined €100,000 “for breach of its disclosure requirements”.
Iliad and Mr Lombardini, who was chief executive at the time, are planning to appeal the conviction. But Loïc Dessaint, head of Proxinvest, said: “It’s not acceptable to see this type of negligence or bad behaviour.”
Mr Niel, Iliad’s chief strategy officer and its majority shareholder, continues to back the management, most of whom have worked at Iliad for more than a decade.
In recent years Mr Niel’s profile has soared, reflecting his €250m backing of Station F, a vast start-up incubator in Paris; his investment in French newspaper Le Monde; and his early support for president Emmanuel Macron.
Iliad last May announced a management shake-up after reporting disappointing quarterly earnings, promoting Mr Reynaud from chief financial officer to CEO, replacing Mr Lombardini, who became chairman.
Several investors said this reshuffle was little more than a game of musical chairs that has not improved performance. “The one thing that is clear is that this management has underperformed yet been promoted,” said an investor.
“Iliad changed the management without changing the management,” said another shareholder. “They haven’t brought in new blood; you can’t change the recipe if you still have the same ingredients.”
Looking ahead, Iliad will try to reassure investors on Tuesday that its new strategy is working. A spokesperson said its strategy was bearing fruit in France and the Italian launch has been a success. Iliad has also sought to address concerns about cash flow by saying that it may try to raise funds by selling part of its mobile network.
But analysts believe investors’ patience with Iliad’s management is running out. Citi’s Mr Patel said: “I’d like to see Xavier Niel giving the management his backing but also telling the market that heads will roll if the business hasn’t turned around in 2020.”