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Tuesday, 31 May 2016

The Xavier Protocols

French T-Mo bid looks like peak TMT Entrepreneur

TMT-men are the superheroes of finance today. A market boom has let telecoms, media and technology dealmakers such as John Malone of Liberty Global and Masayoshi Son of SoftBank finance ever-bigger dreams. Xavier Niel, the billionaire behind French telecoms group Iliad, is now bidding $15 billion in cash for 56.6 percent of T-Mobile US, listed but two-thirds owned by Deutsche Telekom. Maybe this idea should have stayed in the lab.

Niel and his billionaire counterparts have gone on a global shopping spree, aided by cheap and abundant debt, their own rising stock prices, and a knack for slashing costs. Malone, who has bought pretty much everything he can in European cable, is now eyeing big content acquisitions. Patrick Drahi, Niel’s compatriot, heads an empire sprawling from Israel to the Caribbean, and was able to garner $100 billion-plus of orders for bonds to help buy SFR from Vivendi. As for Son, his hubristic goal is to build the “world’s biggest company - by all measures.”

Niel’s bid carries far less antitrust risk than Son’s plan to combine T-Mobile with Sprint. But it is otherwise problematic. It’s a stretch for Iliad, itself worth $16 billion. Espirito Santo Investment Bank analysts reckon that before savings, leverage would start at an eye-watering 4.5 times EBITDA. And a synergy target of $10 billion is bold. This is not based on scale benefits but is effectively a bet that Iliad can turn a flabby T-Mobile US into a streamlined, super low-cost outfit like itself. Never mind that T-Mobile under Chief Executive John Legere is already gaining ground.

There are other reasons for scepticism. Both groups are low-cost operators, but Iliad prospered by piggybacking on the former monopoly’s network. Moreover, it lacks local expertise, and T-Mobile US’s history illustrates the difficulty foreign operators have experienced Stateside.

Perhaps this is an inspired moon shot from Iliad. More likely, it just marks the pinnacle of a long TMT boom. Indeed, the ESIB telco analysts call it “one of the most bizarre bits of potential M&A” the sector has ever seen. Call it peak TMT Entrepreneur.

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Iliad said on July 31 that it had made a surprise $33-a-share cash bid for 56.6 percent of T-Mobile US, a total of $15 billion. The French telecoms operator has a market capitalisation of $16 billion. Iliad said the cash would come from raising debt and 2 billion euros of equity. The company’s billionaire founder Xavier Niel would participate in the capital increase.

Japan’s SoftBank, which controls No. 3 U.S. carrier Sprint, had agreed in principle to a deal to buy No. 4-ranked T-Mobile US for about $32 billion, or roughly $40 a share. However regulators have warned Sprint not to proceed with a deal for antitrust reasons.

Iliad said that, after allowing for the value of its anticipated synergies, the deal was worth about $40.50 a share to owners of the other 43.4 percent of T-Mobile US, or some $36.20 a share on average for the whole company. Iliad said this represented a 43 percent premium over the company’s share price on Dec. 12, 2013, before rumours emerged of Sprint’s interest.

The French group said it anticipated $10 billion of synergy value, without clearly defining the figure. Sources familiar with the situation told Reuters Iliad believed it could generate $1.5 billion to $2 billion in extra annual EBITDA by running T-Mobile US in a more streamlined manner, because the group was inefficient and managed costs badly.

T-Mobile US’s majority owner, Deutsche Telekom, declined to comment. However, one person close to DT told Reuters a deal with Iliad had a certain appeal because of the lower antitrust risk. A second person said there were doubts whether Iliad’s offer was competitive or could get financing, but it could be worth taking a discount to avoid heavy regulatory scrutiny.

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