By Elvira Pollina and Paul Sandle
MILAN/LONDON/PARIS (Reuters) -Iliad said on Monday it had submitted a proposal to Vodafone (LON:VOD) to merge their Italian units, a move that would combine its fast-growing consumer base with the British company's strength in business in a highly competitive market.
Shares in Vodafone, which said last month it was reviewing options in Italy, rose 6.6% on the joint-venture proposal, which Reuters first reported on Friday.
The French company's move comes as Vodafone also explores a potential deal with Swisscom's Fastweb Italian unit, sources familiar with the matter said.
Operators in Italy are studying ways to consolidate a market grappling with shrinking revenue and margins, which is depriving investors of returns on their capital.
Vodafone said it noted Iliad's offer, which would create a company with an enterprise value of 14.9 billion euros ($16.3 billion) and had the backing of Iliad's board and its main shareholder Xavier Niel.
"Vodafone is supportive of in-market consolidation in countries where it is not achieving appropriate returns on invested capital and confirms it is exploring options with several parties to achieve this in Italy, including through a merger or a disposal," it said.
Under the plan, Vodafone would receive 6.5 billion euros in cash and a 50% stake. It would also receive a shareholder loan of 2.0 billion euros to ensure long-term alignment, Iliad said.
Iliad, which will receive 500 million euros and an identical shareholder loan, would have an option to buy a further block of 10% of shares each year at the price when the deal closes.
The French company offered 11.25 billion euros to buy Vodafone Italy outright last year but was rebuffed. Later that year, Niel took control of a 2.5% stake in Vodafone.
The two companies had been in talks for some time before Iliad made its proposal public on Monday, one person familiar with the matter said, but sticking points included governance and which company would appoint the chief executive.
BIGGER SAVINGS
A tie-up with Fastweb, which has a fibre network and offers mobile through network-sharing deals, would not face the same tough regulatory hurdles, analysts noted.
But the potential synergies offered by Iliad, which it put at more than 600 million euros a year, would be higher, and Citi said this month it viewed such a deal as the best outcome.
Iliad, which launched in Italy only six years ago, said the merged business would be expected to make core earnings of about 1.6 billion euros for the year to end-March, implying a multiple for the deal of 7.8 times, higher than the 7.1 times multiple offered last year.
Shares in Telecom Italia (BIT:TLIT) rose 3.7%, with traders citing optimism over a tie-up between Iliad and Vodafone, which would reduce the number of players in the market. Swisscom was up 2%.
Telecom Italia (TIM) leads in mobile, including machine-to-machine, with 28% of the market, followed by Vodafone with 27.4%, Hutchison's Wind Tre with 23.8% and Iliad with 9.4%, according to Italian regulator AGCOM's latest data.
TIM has nearly 40% of the fixed-line broadband market, while Vodafone has 16.7% and Fastweb has 14.1%.
($1 = 0.9160 euros)