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Iliad has boosted profits but lost control

Hauling that immense wooden horse through the city gates, the Trojans thought they had landed a prize. Hours later, under attack by the Greek troops hidden inside, they came to regret their carelessness. Iliad may turn out to have more in common with the Homerian epic than just its name. The French operator is currently rejoicing after welcoming infrastructure investors into its network in recent months: The danger is those firms use their deals as a modern-day Trojan horse.

Right now, they must seem like a gift from the gods. Iliad's share price rose as much as 18% this morning in Paris after just-published results showed a quintupling in net profit last year, to about €1.7 billion ($1.9 billion). That helped the operator reclaim some of the value it has lost to the COVID-19 crisis in recent days. At €107.70 when the market opened, the share price remains well below its 12-month peak of €138.95 on February 10. But it is about a fifth higher than its level this time last year.

The increase in profit stems mainly from the deal with Cellnex announced last May and completed in December. Under the terms of that contract, Iliad sold a huge stake in its mobile towers business for about €2 billion ($2.2 billion). The agreement would not only speed up network rollout in both France and Italy, where Iliad provides services, but also generate hundreds of millions in cash proceeds for the next seven years, said Iliad. The downside was that Iliad basically gave up control, retaining only 30% of the business it called Iliad TowerCo.

Cellnex is not the only company that has infiltrated Iliad's network, either. In September, the French operator announced a separate infrastructure deal with InfraVia, a private equity firm, under which it will sell a 51% stake in its fiber networks outside densely populated communities. Valuing those networks at €600 million ($662 million), the deal is similarly intended to speed up rollout and allow Iliad to concentrate on serving customers rather than managing infrastructure. As in the case of Cellnex, it represents a loss of control.

Iliad evidently believes the benefits outweigh the disadvantages. As an asset-light business, it can reduce leverage, free up capital for other investment activities and present a more robust challenge to rivals such as Altice, Bouygues and Orange. But it has effectively relinquished the role of landlord to become a tenant for the property it once owned. The interests of Cellnex and InfraVia might currently be aligned with Iliad's. What if they diverge in future?

If there were zero concern about this possibility, then other service providers under similar financial pressure would have no obvious reason to rule out Iliad-like moves. The most prominent to have done so is Vodafone. Burdened by debt after takeover activity and a splurge on European spectrum licenses, the UK-based operator is setting up a holding company to manage network assets throughout Europe. It has ruled out the sale of a majority stake in this venture and even expressed wariness about ceding control at a local level.

"It comes down to whether there is a good supply of towers in a market," said Nick Read, Vodafone's CEO, when answering questions on the subject last year. "Is control a strategic imperative or is there lots of access to towers in a market, in which case we may be open to a majority sale?"


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Orange, Iliad's biggest French rival, is even more determined to retain majority ownership of network assets. Last December, it also announced plans to set up towercos in most European countries and eventually consolidate them into single European towerco. "Orange will retain control of these entities in all the European countries where they are created," it said in its statement. Eyeing similar moves, Germany's Deutsche Telekom appears equally resistant to any outright sale.

For the time being, no one at Iliad seems worried about the long-term implications of the divestment activity. And the latest results include much to celebrate. In Italy, where it has been eating into the market share of its older rivals, it added another 2.4 million mobile subscribers last year, giving it nearly 5.3 million in total. In France, there was a continued shift to higher-speed and more lucrative network services. Sales rose 9%, to €5.3 billion ($5.9 billion). Net debt fell nearly 10%, to €3.6 billion ($4 billion). Amid all the anxiety about COVID-19, investors were chuffed.

The Trojans were also feeling triumphant after spotting that horse. A few hours later their mood had dramatically changed.

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— Iain Morris, International Editor, Light Reading

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