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Financials Forecasts Mergers & Acquisitions

Italy braces itself for France-style disruption by Iliad

Telecom Italia and Vodafone will be under pressure if 3/Wind merger goes ahead, with Iliad snapping up divested assets

Iliad’s bid to acquire assets of Italian mobile operator Wind sent shares in incumbent Telecom Italia spiralling downwards by almost 10% as shareholders braced themselves for market disruption similar to that inflicted on France by Iliad’s Free Mobile launch.

The French cable/wireless group has agreed to acquire a portfolio of base stations, spectrum and other assets, which Vimpelcom-owned Wind proposes to divest in order to make its planned €21.8bn merger with Hutchison’s 3 Italia more palatable to EU antitrust regulators. Iliad is keen to expand its disruptive business model to more markets, and was interested in asimilar deal in the UK, had the merger of O2 UK and 3 UK been approved.

“The remedy package would enable the Iliad group to offer competitive mobile services and to become a fourth mobile network operator with nationwide coverage,” the company said in a statement. It will pay €450m between 2017 and 2019 for 35 MHz of paired spectrum – 5 MHz in the 900 MHz band, and 10 MHz each in 1.8 GHz, 2.1 GHz and 2.6 GHz. It will also buy “several thousands of macro sites” in densely populated areas, as well as several thousand more in rural areas (though there is also an option to replace the latter with a RAN sharing agreement with the 3/Wind operator). Iliad has also negotiated a five-year roaming agreement, renewable for another five years, for the merged entity’s 2G, 3G and 4G networks.

This deal, if it becomes a reality, will concern the leading mobile operators, Telecom Italia and Vodafone Italy, more than the creation of a stronger third player in the shape of 3/Wind. That merger is a defensive move, part of a wave of consolidation which is necessary if established European players are to have the scale to survive with their traditional model. The disruption, however, sets in when new entrants attack those business models and make them even less tenable.

The rise of companies like Iliad and its rival Altice is yet another threat to growth and profit for beleaguered European operators. Not only are they dealing with saturated markets, economic downturn, costly infrastructure upgrades and over-the-top competitors, but now they have to face up to the disruptive onslaught of a new breed of players, which harness WiFi and cable to shake up the cost structure for supplying mobile services, and hence unleash aggressive price wars.

In France, Iliad/Free used its cable and WiFi connections to support low cost WiFi-first mobile services and multiplays, undercutting established players dramatically and sparking a wave of consolidation and cost-cutting programs. The same could happen in Italy if Iliad succeeds in acquiring Wind.

However, regulators in the EU still tend to look at mergers within the context of separate mobile and fixed-line markets, rather than the fact that most large operators now cross those lines and compete on multiplay offerings. So a key priority is still to avoid any reduction in the numbers of MNOs in a market – even one with active MVNOs and WiFi providers, like the UK, where the 3/O2 deal was rejected. If a four-to-three merger is approved, as in Ireland, Germany and Austria, stringent conditions are usually set to encourage more competition, either from stronger MVNOs or new entrant network owners.
The latter is Iliad’s hope for expansion – it failed in the UK, but consolidation will continue in Europe and elsewhere and it will be poised to snap up assets which have to be divested as a result. The Commission has until September 8 to rule on the proposed Italian merger.

By contrast, Vodafone’s most recent set of financial results highlighted the problem facing European mobile operators. Its Europe operations did deliver slight revenue growth in fiscal Q416, but this was the first time for a full 22 quarters, and nearly all the sales growth and profit was coming from the emerging markets like India, where revenues were up 10% and EBITDA margin was almost 30%.
These are results which operators can no longer dream of in Europe, where they are relying on consolidation and quad play services to increase market share and revenue. But even that strategy is being threatened by disruption from cable and WiFi players, MVNOs and over-the-top providers. No wonder, then, that Vodafone’s M&A teams are looking eastwards.
Vodafone India, increasingly the powerhouse in the Vodafone group despite the intense competitive pressures in the market, is the favorite to acquire Telenor’s Indian subsidiary. The purchase would boost Vodafone’s spectrum capacity and its 4G coverage, putting it in a better position to deliver high value services to improve ARPU, to compete more effectively with market leader Bharti Airtel, and to resist the imminent launch of new wireless entrant Reliance Jio, with its 4G-only network.

According to the Economic Times, Vodafone might acquire the whole Telenor India unit, or just its spectrum licences, which cover seven of the country’s 22 operating regions or circles. None of the operators, except Jio, succeeded in securing LTE spectrum in every circle and several of them, including Bharti Airtel, have since been acquiring smaller operators, or spectrum assets, to try to achieve nationwide coverage.

This process will be bolstered by the upcoming mega-auction of spectrum in the 700 MHz, 800 MHz, 1.8 GHz, 2.1 GHz, 2.3 GHz and 2.5 GHz bands. However, with high reserve prices in the low frequency bands, it may be more cost-effective, in some cases, for large MNOs to stock up their arsenals through M&A rather than relying only on auctions.

Telenor has hinted since the spring that it was considering an exit from India, unless it could secure enough spectrum to be fully competitive with the larger players, and to be able to offer high value services and escape the bitter price war which afflicts basic voice and data services in the country. However, the Nordic operator may not make the final decision until after the auction, when it will see how much additional spectrum it can acquire by that route. But Economic Times’ source said Vodafone was impatient to move quickly, especially with Jio hovering in the wings. “The wait till the auction will further delay deployment for Vodafone. The markets covered by Telenor are populous markets with significant ground for Vodafone to gain,” said the source.

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