Friday 21 June 2019

Share Watch: Iliad has a lengthy tale of woes


Xavier Niel. Photo: Bloomberg
Xavier Niel. Photo: Bloomberg

John Lynch

It seems like a million years since Margaret Thatcher launched her "shareholder revolution" in Britain and the population there was asked to share the "success" of privatised businesses like water, electricity, transport and telecommunications.

Ever anxious to play "follow the leader", we did the same here and the most memorable trip down that trouble-strewn path was the privatisation of Telecom Éireann, which ended up sinking more ships than a wolfpack of U-boats.

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The experience was painful. But it is useful to remember that for all its chameleon-like changes over the past two decades, the shape of that old state-owned monopoly, now Eir, survives. Today it is controlled by the French telecoms tycoon Xavier Niel,  who founded Iliad, the company we are examining this week.

Iliad SA is based in Paris and has more than 20 million customers, mainly in France, and three million in Italy. Its value on the Paris Bourse is €6bn. The company was founded by a colourful entrepreneur and one of France's richest men, Xavier Niel, 24 years ago when, following a takeover of an internet provider, he renamed it Iliad.

In 2002 the company launched a low-priced broadband package setting the benchmark in the French market. Ten years later he launched a very competitive mobile service which quickly captured 20pc of the market and revolutionised mobile telephony in France. Iliad shares soared and doubled in the five years up to 2017.

However, all is not well at Iliad. Last year its shares fell more than 40pc and now trade at around €100 a share. While investors worried over the difficulty of generating cash, the chairman was "done" for insider trading.

Last year the group lost 250,000 subscribers, almost 100,000 broadband customers and significant revenues and profits in its core French market.

Corporate governance group Proxinvest has recommended that investors oppose the pay resolution for five Iliad directors costing €53m. They also question the share plan for 23 employees granting them 5pc of the share capital of offshoot Free Mobile. Apparently their payment is linked to the performance of Free Mobile, not Iliad, but with an option to receive their entitlement in cash or Iliad shares.

The insider dealing affair has not gone away either. Iliad's one-time chief executive, now chairman, was fined €600,000 when he apparently offloaded stock weeks before a failed bid for the US telecoms group T Mobile. He intends to appeal the decision but it's left a sour taste with investors.

The group tried to calm the situation at a recent investor day, but with limited success. In a rare admission, Mr Niel admitted the group made mistakes and was probably arrogant. At the same meeting he announced a plan to raise €2.7bn by selling 10,000 mobile masts in France, Italy and Switzerland to the Spanish infrastructure group Cellnet Telecom. The proceeds will allow the group to cut debt and counter the increase in competition.

However, the debt may not fall as the company hopes, because the mast sales have service agreements for 20 years which could be seen as an operating lease. If this is the case, new accounting rules would require it to be treated as a debt.

Unfortunately the masts deal is unlikely to solve the group's lack of profitability and its policy of cost competitiveness might be backfiring with competitors dropping prices further and pressuring France's fourth-largest telecom group.

The answer, according to some, may be to reduce the number of French telecos from four to three. This of course would need regulatory approval. Should President Emmanuel Macron permit consolidation, that would drive up customer costs, increase job losses and anger Yellow Vest protesters. Given all these potential troubles, I'd give Iliad shares a wide berth.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.

Irish Independent

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