France’s Iliad Must Build at Home After Scrapping T-Mobile Bid Telecom Operator Will Need to Invest in More Spectrum, Network Capacity to Compete
Iliad ILIAY -9.09% will need to redraw the map in France now that it has dropped plans for U.S. expansion.
Abandoning a costly bid for T-Mobile US TMUS -0.19% leaves the French telecom operator with more financial flexibility to try to win market share domestically. Investors welcomed the decision, pushing the stock up about 10% Tuesday after Iliad said a new proposal to buy 67% of T-Mobile US at $33 a share was rejected by majority owner Deutsche Telekom. DTE.XE -0.96%
But Iliad’s shares are still down about 15% this year. The road back home also has its challenges.
Iliad’s first task will be to bolster its mobile market share, particularly among top-end subscribers. The company has gained about a 12% market share since it began offering mobile services two years ago, thanks to cutthroat pricing tactics. Its future success, however, will be more dependent building out its 4G network to attract higher-paying customers.
Iliad has thus far been sharing Orange’s 3G network under a wholesale agreement, but that is set to expire in 2018, with certain services to be discontinued as early as 2016. France’s telecom regulators have signaled they aren’t in favor of the two companies renewing the agreement, putting more pressure on the upstart to roll out its own network and add more spectrum to support growth.
Iliad also needs to maintain, if not improve, its position in broadband in the face of mounting competition. This year, rival Bouygues EN.FR +4.59% Telecom lowered prices for broadband customers; it also announced a partnership to offer Netflix services on set-top boxes as part of its two-year plan to gain fixed-line market share.
Consolidation in the French market would undoubtedly help Iliad. But Bouygues and Iliad have tried and failed to strike a deal before. Bouygues has pledged to markedly improve free cash flow by 2016; if the company stumbles, that could kick-start consolidation talks again.
For now, Iliad shouldn’t be distracted from shoring up its position domestically. The company is trading at about 8.4 times 2014 earnings before interest, tax, depreciation and amortization compared with about five times for Bouygues and Orange, according to FactSet. That assumes a rate of growth that may prove difficult to deliver as the company develops beyond its role as a cut-price disrupter in France’s telecom market.
With T-Mobile US in the rearview mirror, Iliad still has plenty of potholes to navigate.