The FINANCIAL — London-26 September 2011: The likely outcome of Iliad's winning of fourth generation (4G) French mobile spectrum in the auction on 22 September illustrates the opportunities provided by partnership between companies, Fitch Ratings says.
Iliad's capex-lite strategy to date suggests roaming will continue to form a significant part of its operations. This strategy is expected to be a useful source of revenue both to Iliad's roaming partner, currently France Telecom (A-/stable), and TDF Group, France's largest towers business.
The capex demands of 4G will put pressure on mobile operators' cash flow generation throughout Europe. This makes network sharing or roaming more likely, providing opportunities to those players with the flexibility to invest, and to third party network providers such as towers businesses.
The French auction, the first of two, was for the less desirable 2.6GHz spectrum. Total receipts were EUR936m, roughly a third above the reserve price. This is broadly in line with Fitch's expectations for these auctions, which are expected to be far less costly than the 3G auctions in 2001. The more attractive 800MHz spectrum, with reserve price of EUR1.8bn, will be auctioned later in 2011, with results expected early 2012.
In this first auction, spectrum was allocated to all four players, with the largest 20MHz blocks going to France Telecom's Orange and Iliad. Vivendi's SFR (BBB/Stable) and Bouygues Telecom both took smaller 15Mhz blocks.
Iliad's mobile operations' current capex-light model is based on it installing its own equipment in major urban areas, but principally relies on roaming agreements with France Telecom to cover the rest of the country, in a deal which should provide the incumbent with a EUR1bn secured revenue stream in total over the next three years. Iliad is currently rolling out its network on TDF's infrastructure, with 1,000 TDF sites expected to be equipped with Iliad's equipment by end-2011.
Iliad's approach to capex spend is a sensible mitigant to its high-risk entry as a fourth player in the French mobile phone market. Late entrants into established markets have often found going difficult with examples including the UK's Hutchinson 3G or more recently TeliaSonera's ('A-'/Stable) Yoigo brand in Spain. Balanced against this challenge is the strong brand capital Iliad has built up through its fixed-line offerings.
Winning 2.6GHz spectrum was important for Iliad – regulatory approval of its roaming capability was subject to the acquisition of this spectrum. It is required only to apply for 800MHz spectrum, but not necessarily to win any. Fitch believes that Iliad may choose to satisfy itself with spectrum in the high frequencies only to cover dense areas and rely on roaming agreements to gain national coverage.
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