Iliad can finance increased T-Mobile offer but synergies hard to prove
Iliad [EPA: ILD] can “easily” find additional equity to increase its USD 15bn offer for T-Mobile US, a source close to the situation said, describing its USD 33 per share offer as the starting point for negotiations.
Iliad last month offered USD 15bn in cash for 56.6% of T-Mobile US [NYSE:TMUS], at USD 33 per share. It valued the remaining 43.4% of T-Mobile US at USD 40.50 per share on the basis of USD 10bn of synergies to the benefit of the T-Mobile US shareholders.
Deutsche Telekom [ETR:DTE], which owns 67% of T-Mobile US, rejected the offer on the basis it did not add value for shareholders. As a standalone company, T-Mobile is worth USD 40 per share, a person familiar with the company said.
Iliad’s approach would leave Deutsche Telekom with a 29% stake in T-Mobile US. But, Deutsche Telekom wants to sell out of T-Mobile US completely over the next few years, which may be difficult with around 30%, the source said. So, Iliad will likely have to increase the stake it proposes to buy from Deutsche Telekom.
Iliad said its original USD 15bn offer would be financed via a combination of debt and equity, having the support of banks – understood to be BNP Paribas and HSBC – for the former. The equity portion would be approximately EUR 2bn, with Iliad founder Xavier Niel participating in the capital increase.
An increase in the stake it proposes to buy from Deutsche Telecom will require an increase in both equity and debt financing, but an increase just in the USD 33 per share offer price can be financed through additional equity only, the source said.
EUR 2bn is not a large amount for Iliad, the source said, especially given Niel’s participation, he added.
Additional equity could be raised at the Iliad level or from new investors in T-Mobile US, the source said.
But, as well as increasing its offer, Iliad must also prove there are synergies to a deal. A sector banker following the situation was sceptical, believing Iliad does not possess the assets or business to entice Deutsche Telekom into a deal.
Given that Iliad is a reseller of services and does not own its own network, it is difficult to see how it will realize USD 10bn of synergies from the T-Mobile network, the banker said. There are no cost synergies to be gained from tower consolidation or benefits from combining the spectrum of the two companies, he noted.
Deutsche Telecom, meanwhile, has done an excellent job at creating value with the US assets since its failed deal with AT&T [NYSE:T]. After US regulators shot down the deal, T-Mobile received 10MHz of nationwide spectrum. T-Mobile was also able acquire 700MHz of spectrum from Verizon [NYSE:VZ] earlier this year, a purchase financed from the AT&T USD 4bn break-up fee.
T-Mobile’s purchase of wireless company MetroPCS also saw T-Mobile listed separately on the New York Stock Exchange. Deutsche Telekom can sell shares of the company slowly over time or execute a secondary offering, this banker said.