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.
Continue Reading Below
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. mobile operator.
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 Boston.
"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' profits.
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 said.
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.