Iliad profits soar, sees lift from merger of rivals

By Leila Abboud and Gwénaëlle Barzic

PARIS (Reuters) - Shares in French low-cost telecoms company Iliad soared 15 percent on Monday after it announced industry-beating sales and profit growth and signed what could be a transformative mobile network deal with larger rival Bouygues.

Iliad, backed by tycoon Xavier Niel, stands to benefit from sector consolidation in prospect after media company Vivendi received two bids for the second-biggest French mobile service, SFR.

Bouygues, which is one of the bidders, said on Sunday it had agreed to sell its entire mobile network and some of its spectrum to Iliad for up to 1.8 billion euros ($2.50 billion) to assuage regulatory concerns if Vivendi accepts its offer for SFR.

That would be a major boost for Iliad, bringing it increased mobile coverage at the flip of a switch as an alternative to the costly build-out of its own network.

The group put up 700 new mobile masts last year to take its total to 2,500. It would get 15,000 masts from Bouygues.

Iliad would also stand to acquire a valuable portfolio of mobile licenses from Bouygues, including some in the 800 megahertz band that are known as "golden frequencies" for the quality and range of coverage they offer.

Iliad has far less spectrum than the other operators, so getting most of Bouygues' will allow it to improve services and cut its reliance on a roaming contract with leader Orange, which carries its traffic while its network is being built.

Analysts estimated that Iliad paid Orange 600-700 million euros for roaming last year. The contract has been costly but has allowed Iliad to offer national coverage from day one while it builds its network.

Iliad said on Monday its Free Mobile service signed up more users than rivals last year, taking its customer base to 2.8 million and giving it a 12 percent market share - just two years after its launch. The broadband business, its main cash generator, added 276,000 new customers on a net basis for the year.

"TWO MONSTERS"

Niel, Iliad's founder and largest shareholder with a 56 percent stake, threw his weight behind Bouygues' bid for SFR, the country's second-biggest mobile operator, and criticized a rival bid from cable operator Numericable as bad for the quality of France's networks and its consumers.

Speaking to reporters on Monday, Niel said the Bouygues-SFR tie-up would reconfigure the market around three evenly-matched competitors - current leader Orange, the new SFR-Bouygues and a stronger Iliad.

"We would have the tools to fight against the two monsters," said Niel.

If Bouygues wins its bid for SFR, it would take the French mobile market back to being served by three companies just four years after Iliad was awarded a license to increase competition in an industry that once enjoyed some of the biggest profit margins in Europe.

Iliad's entry sparked a price war that took a chunk out of its rivals' earnings, forcing them to cut costs and staff.

Niel vowed to keep up relentless pressure on its competitors even if the market goes down to three mobile services.

"We will create competitive pressure in the market, as we have always done, by being extremely innovative and aggressive."

The formula has served Niel well in the 15 years since he founded Iliad and surfed on the opening of the French market to competition to create a company worth more than 10 billion euros today. Niel is #162 on Forbes' richest list.

But shares in Orange rose 3 percent, suggesting France's former telecoms monopoly would also benefit from the removal of a competitor.

Bouygues was up almost 9 percent.

Robin Bienenstock, analyst at Bernstein Research, welcomed a possible combination of SFR and Bouygues.

"We think that this is the best deal for Vivendi, Bouygues, Iliad and Orange, easing price pressure in both wireless and wireline," she said in a note.

"Altice (the 40 percent owner of Numericable) seems likely to raise their offer to avoid being left out."

Iliad's shares were up 11 percent at 210 euros by 1345 GMT (8:45 ET), below an earlier high of 222.85 euros. Numericable tumbled 12 percent to 25.00 euros.

Vivendi's board is expected to meet later this week to decide the future of SFR.

Iliad's revenue last year rose 19 pct to 3.7 billion euros ($5.13 billion), while earnings before interest, tax, depreciation and amortization rose 31 percent to 1.2 billion euros, and net profit jumped 42 percent to 265 million euros.

Analysts had on average forecast sales of 3.75 billion euros, EBITDA of 1.16 billion, and net profit of 299 million. ($1 = 0.7214 euros)

(Reporting by Leila Abboud and Gwenaelle Barzic; editing by Natalie Huet and Tom Pfeiffer)