Iliad’s Polish Play

Maverick French group set to expand European operation

Yesterday, French telecom group Iliad launched an offer to buy all the shares of Polish operator Play, having already secured about 40% from two leading shareholders. The deal values the company at €3.5 billion and will be financed by cash and debt.

Under founder and majority shareholder Xavier Niel, Iliad has steadily created a substantial position in the European telecom space. If its deal for Play goes through, it will catapult Iliad to 34.7 million mobile customers, leapfrogging Altice, BT and Telecom Italia as the sixth largest operator in Europe. In addition to Poland and its home market, Iliad has a mobile operation in Italy and a stake in Irish operator Eir. Separately, Mr Niel owns a direct stake in Swiss operator Salt.

Iliad and Play appear to have a similar make-up, so the deal initially seems like a natural fit to me. Both companies created challenger brands based on low and simple pricing and have quickly built market share.

Iliad is best known for one of the most disruptive launches ever by a European mobile operator. In 2012, it caught its French rivals off guard as its keen pricing lured millions of customers and kick-started a brutal price war from which the market is only just recovering. Iliad boasts more than 13 million mobile customers in France.

Like Iliad, Play has also enjoyed strong customer growth. Launched only in 2007, it already has 15 million mobile customers and is in pole position in the market with a 29% share, ahead of big-name local rivals Orange and T-Mobile.

In a country with 38 million people, there’s plenty of room for further growth and disruption. And with many household budgets strained by the impact of the pandemic, I believe the timing of Iliad’s investment into a disruptive provider is astute.

But this isn’t a deal based purely on low mobile prices. A leading aim is to bolster Play’s entry into the Polish fixed-line market. Earlier in 2020, Play began offering fixed-line services in a wholesale deal with cable company Vectra. Details of the fixed-line strategy are sparce, but it’s likely that Iliad will use its experience in other regions to offer a disruptive service that will act as a springboard for a move into convergence. With penetration of fixed-line broadband in Poland at only 55%, according to Iliad, it appears there are plenty of customers to go after.

Iliad is also moving from pure-play mobile into fixed-line services in Italy, where it plans to roll out an offering by mid-2021 and recently signed an agreement with wholesale provider Open Fiber. The push will further heat up competition after pay-TV operator Sky Italia introduced a broadband service in July 2020.

Iliad switched on mobile services in Italy in June 2018. However, unlike in its home market, it had no existing fixed-line network or brand presence to use to its advantage. Still, its similarly assertive pricing tactics helped it already capture an impressive 8% of the market, about 6.3 million customers. And there’s little sign of the operator resting on its laurels; it currently offers a deal including 100GB of data for just €9.99 per month. Iliad’s presence has prompted rivals to slash their own prices and share infrastructure to cut costs.

Iliad’s move to buy Play, however, is different in that the operator already has a strong and established position. Acquiring a ready-made provider brings a high upfront purchase price ― it would be Iliad’s biggest acquisition to date ― but avoids the heavy investment needed to get a network off the ground and promote a new brand.

Play is well known to offer value for money, and its presence has already shocked the market, so I don’t expect Iliad’s entry to have the same effect in Poland as it has in other countries. Still, its rivals should avoid complacency; Iliad is an unpredictable and maverick company.

Announcing the deal, Iliad also highlighted efforts to better digitalize Play’s offers and exploit its online experience in other markets. Again, details were light, but the timing once more looks shrewd as the pandemic has pushed many people into buying online. I wonder if this poses a threat to Play’s more than 750 branded retail outlets, in pursuit of cost-savings to fund its new strategy.

Iliad also said it will advance plans by Play’s management to spin off or sell passive infrastructure. Again, this draws on its experience; in 2019, Iliad announced the sale of mobile tower infrastructure in France and Italy to Cellnex for €2 billion (see Insight Report: Monetizing Mobile Towers Can Help Operators Fund 5G Expansion).

In my view, Iliad’s announcement could be just the start of a flurry of deals in the European sector over the next couple of years as operators return to the negotiating table. There are a few factors that could make this happen: firstly, the possibility of more favourable regulation as authorities recognize the industry’s stellar efforts during the health crisis; secondly, depressed valuations throughout the sector may open the door to opportunistic bargain-hunters; and thirdly, and perhaps more importantly, the landmark court ruling that annulled the 2016 decision to block Three’s acquisition of O2 in the UK could prod operators to look for fresh deals.

Mergers and acquisitions in the telecom space is one of the topics I’ll be addressing during CCS Insight’s Predictions for 2021 and Beyond digital event, which runs from 5 to 9 October 2020. For more information and to sign up for free, click here.