Iliad makes fresh bid to tempt Vodafone into an Italian merger

Another European telecoms merger could be on the cards, at least if billionaire Xavier Niel gets his way. Niel's France-based telecoms group Iliad has just submitted a proposal to Vodafone to merge their respective operations in Italy.

Notably, this marks the second time that Iliad has attempted to forge a deal with Vodafone on the Italian market, although the UK-based group last year rejected a previous offer of €11.25 billion (US$12.3 billion) to buy Vodafone Italy outright.

Vodafone is currently keeping its powder dry, merely issuing a statement to acknowledge Iliad's proposal, and saying it is supportive of in-market consolidation in countries where it is not achieving appropriate returns on invested capital.

It also confirmed it is exploring options with several parties to achieve this in Italy, including through a merger or a disposal. The UK-based group is already rumored to be exploring a potential deal with Fastweb, Swisscom's Italian unit.

"There can be no certainty that any transaction will ultimately be agreed. If required, a further announcement will be made when appropriate," Vodafone added.

During the presentation of the group's first-half results to the end of September 2023, CEO Margherita Della Valle had said more needs to be done on "right-sizing" the company's portfolio.

While Vodafone has already found solutions for two of its three problem markets, with the proposed merger between Vodafone UK and Three UK and the planned sale of Vodafone's Spanish unit to Zegona, a solution for Italy has proved more elusive.

If at first you don't succeed…

After being knocked back by Vodafone last year, Iliad had indicated that it would pursue a stand-alone strategy in Italy where it offers both mobile and fixed telecoms services.

However, Iliad intimated at the time that Vodafone had missed a big chance to solve a number of its problems in Italy. The offer had certain "merits," the France-based group said, including fulfilling "Vodafone management's desire for consolidation in Italy."

Now, Iliad has clearly been sufficiently encouraged to make a new offer precisely because Vodafone is still weighing up options for its Italian business.

In a nutshell, Iliad announced on Monday that it has submitted a proposal to Vodafone Group for the merger of their respective businesses in Italy through the creation of a new 50:50-owned entity currently dubbed NewCo.

The proposal values Vodafone Italia at €10.45 billion ($11.4 billion) and Iliad Italia at €4.45 billion ($4.85 billion). In addition to its 50% stake, Vodafone would also receive a €6.5 billion ($7.1 billion) cash payment and a €2 billion ($2.18 billion) shareholder loan. Vodafone's equity in NewCo at closing would be valued at €1.95 billion ($2.12 billion). Iliad would receive a 50% stake plus a €500 million ($546 million) cash payment and a €2 billion shareholder loan.

Iliad would also have a call option on Vodafone's equity stake in NewCo and would be able to acquire a block of 10% of the NewCo share capital every year at a price per share equal to the equity value at closing.

According to Iliad, the proposal would create a strong player with a solid financial profile. It said the merged business would be expected to generate revenues of about €5.8 billion ($6.3 billion) and EBITDAaL of about €1.6 billion ($1.74 billion) for the financial year ending March 2024. It would also benefit from expected annual run rate synergies of more than €600 million ($655 million) in opex and capex.

Thomas Reynaud, CEO of Iliad Group, insisted that the market environment in Italy "calls for the creation of the most innovative telecom challenger, with ability to compete and create value in a competitive environment. We believe that the profiles and complementary expertise of Iliad and Vodafone in Italy would allow us to build a strong operator with the ability and financial strength to invest for the long term. NewCo would be fully committed to accelerating the country's digital transformation and especially fiber adoption and 5G deployment, with more than €4 billion of investment planned over the next five years."

Déjà vu?

To be sure, Italy's telecoms market is extremely competitive with an ongoing mobile services price war. The irony is that Iliad bears some of the responsibility for creating this situation in the first place.

Iliad first entered the Italian telecoms market in 2018 with a low-price mobile offer that caused panic among the incumbent players and prompted the launch of sub-brands (such as Telecom Italia's Kena Mobile, Vodafone ho and WindTre's Very Mobile) that aggressively target customers of rival providers.

In January 2022, Iliad then launched a low-cost fiber plan, with a clear intention to cause further market disruption for its rival operators.

At the same time, Iliad was only able to enter the Italian market because of a transaction that was designed to help two operators survive in Italy's mobile market: 3 Italia and Wind Telecomunicazioni SpA merged to become WindTre, now fully owned by Hong Kong-based CK Hutchison after former Wind owner Veon sold its stake.

Competition authorities, in their pro-consumer wisdom, refused to let a merger go through unless 3 Italia and Wind sold a chunk of their business to another player. In this way, they would ensure Italy remained a four-player mobile market.

3 and Wind then opened discussions with Iliad about that sale of assets, and ushered in a competitor with a track record of causing carnage on its domestic mobile market in France. Quelle surprise when it had a similar impact on the Italian market.

Regulatory conundrum

Should Vodafone accept Iliad's offer, it remains to be seen if regulators have taken heed of the outcome of previous merger "remedies" in Italy and elsewhere and allow the market to shrink to just three players.The signs are not propitious. As things stand, the European Commission is currently scrutinizing the planned merger of Orange Spain and Másmóvil, and the success of that transaction now appears to depend on an agreement with Romania-based Digi Communications, a telecoms player that itself has proved disruptive in other markets including its own.