November 12, 2019 / 4:02 PM / 6 months ago

Breakingviews - Iliad’s baffling buyback tests investor credulity

Xavier Niel, founder and majority-owner of French broadband Internet provider Iliad attends the company's 2017 annual results presentation in Paris, France, March 13, 2018.

LONDON (Reuters Breakingviews) - Xavier Niel is adding financial wizardry to his reputation for entrepreneurial flair. The French billionaire on Tuesday unveiled a convoluted share buyback and capital increase that could raise his stake in Iliad, the struggling telecom group he controls, by 20%. It looks a costly way to buy shares.

Niel is not alone in being a disgruntled investor in Iliad, which was worth 5.6 billion euros before Tuesday’s announcement pushed the shares up 18%. The stock has almost halved in the last two years, sunk largely by a price war launched by Niel himself. French rivals Orange, Bouygues and Altice Europe have emerged in far better shape, with the latter up more than three-fold over the same period, helped by its massively leveraged capital structure.

Now it’s Niel’s turn for some financial cunning. With Iliad’s revenue from France growing 3.3% in the third quarter, compared with a 5% contraction nine months ago, he is justified in believing the company he founded has turned a corner. It therefore makes sense to increase his exposure. But the method Niel and his bankers have chosen seems unnecessarily complicated.

To start with, Iliad will spend 1.4 billion euros to buy back 20% of its shares. What’s unusual is that it is offering to do so at 120 euros per share – a 38% premium to the average price over the previous three months. Niel will not participate in the buyback.

Next, Iliad is issuing new shares equivalent to the number it is buying back at the same 120 euros price, with Niel underwriting the offering. Given that the shares were trading at around 112 euros by lunchtime on Tuesday, it seems unlikely that any investors will take up the offer. That means Niel will buy all the new shares, lifting his stake to 72%.

It’s unclear why the entrepreneur is paying such a big price to increase his stake, when there was no obvious barrier to prevent him from buying on the open market, where Iliad shares have averaged 87 euros over the last three months. It’s true that the manoeuvre boosted the paper value of his existing Iliad stake by around 500 million euros on Tuesday morning. But Niel’s financial contortions still seem unnecessarily intricate.


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