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Mergers & Acquisitions

Is Iliad poised to wreak havoc in the UK mobile market now?

Telecoms group Iliad is regarded as a cautionary tale, since its Free Mobile unit threw the French mobile market into disarray, and the group’s chairman Xavier Niel has made it clear he would like to repeat the trick outside his home country. Attempts to break into the US by acquiring T-Mobile USA fell apart but now Niel might have his sights on the UK.

According to the Financial Times, Niel has approached UK regulator Ofcom to express “preliminary interest” in entering the country’s mobile market as a by-product of the proposed purchase of Telefonica’s O2 UK by Hutchison Whampoa. That deal, if approved, would reduce the number of MNOs from four to three with the merger of O2 and Hutchison’s 3UK. That is seen as the main reason why competition regulators may not like the idea, even though, if the telecoms and media market is taken as a whole, the UK remains highly competitive.

Last year, the European authorities relented on their usual hostility to supporting a reduction in MNO numbers in a country, and allowed several such mergers to take place, notably in Germany, Ireland and Austria. In most cases, however, the conditions include provision for additional competition via guaranteed access to network and spectrum capacity for a new entrant or MVNO. Niel, it seems, is hoping such a remedy might be proposed in the UK, giving Iliad/Free an entry point. It is widely expected that Hutchison would be required to divest some of the spectrum assets of the combined entity, which would control over half the sub-1 GHz frequencies and 37% of those above 1.8 GHz; or at least to guarantee network access to a newcomer, to create a strong fourth player.

More established operators, with less disruptive potential – and higher cost/margin expectations – than Iliad are fleeing the UK. Telefonica wants to sell O2, while Deutsche Telekom and France Telecom have sold their joint venture, EE, to BT, minus a small stake. The country is saturated and in the grip of consolidation and price wars as the broadband and mobile players chase a quad play platform, and as BT strengthens its incumbency by charging into the pay-TV space, and now re-entering mobile.

However, like Hutchison 3 before it, Iliad is comfortable being a challenger in a tough market. In France, it harnessed its broad base of home broadband lines, WiFi homespots and residential small cells to build ‘inside-out’ wireless capacity at very low cost, reducing its reliance on MVNO deals or on investing in a maximum capacity macro network (though it does have a macro build-out for coverage, combined with MVNO/roaming arrangements). Armed with its affordable infrastructure and the cashflow from its home multiplay offerings, it was able to undercut the three established MNOs, sparking off a vicious price war and a round of consolidation and job cuts.

In the UK, of course, it would not have the readymade base of broadband and home WiFi, so its task would be tougher. However, armed with some of O2/3UK’s spectrum assets, it could partner with one of the home broadband providers which will be left at a disadvantage by the BT/EE tie-up, such as Virgin Media or TalkTalk. Both have extensive home and WiFi installed bases, but limited MVNO reach, reducing their ability to compete with BT’s evolving quad play.

Of course, Iliad may soon be facing further change in its home market too. Orange is in talks with third MNO Bouygues – if that turns into a bid, it will also attract fierce scrutiny from the European competition commissioner Margrethe Vestager, but could leave Free in a tougher competitive climate against an enlarged Orange, and its arch-rival, Numericable-SFR, the combined cable and mobile operators owned by holding group Altice (whose chairman Patrick Drahi has been more successful than Niel in his US ambitions, snapping up two cable providers there). However, Iliad may also get its chance to acquire further assets in France as a result of conditions imposed on any Orange deal.

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