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Iliad, Deutsche Telekom, T-Mobile USA and Chicken

September 20, 2014 - Written By David Steele

We’ve recently reported that T-Mobile USA is contemplating a merger with another carrier and Chief Executive Officer John Legere said that the interest was flattering but is likely to continue. Earlier this year, T-Mobile USA rejected an offer from French mobile operator, Iliad. Now, Reuters is reporting that Iliad has set an internal deadline of mid-October to decide if it should increase its offer for the US group or walk away. The situation is complicated because Deutsche Telekom owns 66% of T-Mobile USA and is reported to be resistive to the proposed deal. Under Iliad’s proposals, Deutsche Telekom would have to keep a stake in the combined business. It appears that the Germans are not confident in the Iliad’s ability to run a business in the North American market, noting that they have no experience of such matters. Iliad is reputed to be in discussion with several North American banks as well as private equity funds to help it finance an improved bid for T-Mobile as, essentially, John said that the business was worth more than the first offer of $33 per share for just over half of the business. It’s believed that Iliad are raising between $5 to $6.5 billion but details are sketchy because these talks are private. Nevertheless, we’re reading reports that claim Iliad could offer between $35 to $40 per stock for an increased stake in T-Mobile.

We’ve already seen that one of the barriers T-Mobile may have erected is that it any deal should improve its network spectrum coverage. Being bought by a European telecommunications operator with no existing US network doesn’t satisfy this criteria. The stockmarket does not like uncertainty and Iliad’s stock price has dropped by a quarter since the original announcement was made: Iliad’s investors will not support a lengthy engagement with T-Mobile USA. Iliad should take decisive action one way or the other. And we know that Deutsche Telekom, which makes about a fifth of core profits from the United States markets, has tried to sell T-Mobile twice since late 2011 because it sees it as too small to compete with market leaders Verizon and AT&T. This included a year-long negotiation with Sprint, which ended because of concerns over regulatory concerns

It seems we have a game of chicken and we’re waiting to see who is going to flinch first. T-Mobile and Deutsche Telekom are waiting for a better offer but are happy to sell. Iliad is interested but doesn’t want to offer too much money for too little benefit. The two protagonists are likely to continue sparring in the coming weeks; for example Iliad reckons it can shave around 7% of T-Mobile’s costs and Deutsche Telekom has scoffed at this, noting that T-Mobile haven’t seen detailed business information.