WASHINGTON Aug 3 French telecoms firm Iliad
will be hard-pressed to meet its goal of generating $2
billion in additional annual operating profit at T-Mobile US Inc
by cutting costs and slashing prices if its takeover bid is
accepted, analysts said.
Iliad, which in recent years has shaken up the French mobile
market with cheap subscriber plans, bid $15 billion last week
for a 56.6 percent stake in T-Mobile, the No. 4 U.S.
The Paris-based company, majority owned by billionaire
founder Xavier Niel, said a merger would result in $10 billion
in synergies and an additional $2 billion in annual earnings
before interest, taxes, depreciation, and amortization (EBITDA).
It would hit those targets by running T-Mobile, majority
owned by Deutsche Telekom AG, in an "Iliad-like" way,
sources familiar with the takeover bid told Reuters.
Even if successful in its takeover bid, Iliad faces
significant obstacles in reaching those cost savings and
negotiating better deals with U.S. cellular transmission tower
operators, said Roger Entner, an analyst at Recon Analytics in
"T-Mobile is not bloated at all. It is cut to the bone,"
said Entner, adding that the carrier doesn't have the legacy
equipment costs other carriers bring in.
"T-Mobile already has a history of squeezing the vendors.
But you can't squeeze water out of a stone," he said. Iliad has
a better chance of raising EBITDA by attracting more customers,
than by cutting costs, Entner said.
"Very few people have cut themselves to growth," he said.
While direct comparisons are difficult because U.S. telecoms
companies get most of their earnings from standalone cellular
service rather than bundles, Iliad's profit margins are roughly
comparable to larger carriers like Verizon and AT&T
but well above T-Mobile's 26 percent.
Iliad's triple-play market bundle in France - a combined
offer of cellular, broadband and cable TV services - has 40
percent EBITDA margins.
On a revenue-per-employee basis, Iliad averages $195,000 per
employee versus $177,000 per employee at T-Mobile, according to
the companies' most recent regulatory filings.
Iliad, which controls about 13 percent of the French mobile
market, entered the mobile industry in 2012 and has a history of
operating at minimum costs with cutthroat rates. Its no-frill
plans start at just over $2 a month.
The company's entry into the French mobile market sent
mobile plan prices down 30 percent and squeezed bigger rivals'
T-Mobile has similarly restructured prices across the
industry in the past year, with aggressive promotions that have
cost its rivals thousands of subscribers. It reported the
industry's largest post-paid phone subscriber additions in the
second quarter of 2014.
"It's a different model," said BTIG Research analyst Walter
Piecyk, referring to Iliad's strategy in France. While Iliad's
EBITDA margins are larger than T-Mobile's, the latter has
advantages like a more developed high-speed network than Iliad,
which depends heavily on volatile roaming agreements, Piecyk
Iliad's bid of $33 per share sets up a potential bidding war
for T-Mobile with rival Sprint Corp, the U.S. mobile
carrier now controlled by Japan's Softbank Corp. Sprint
has bid $40 per share for T-Mobile.
Iliad's bid is lower because it lacks the synergies Sprint
can offer in stringing the two networks together and stripping
out excess towers, staff, IT, and real estate.
(Reporting by Marina Lopes in Washington and Leila Abboud in
Paris; Editing by Paul Simao)