The French telco group Iliad has submitted a proposal to UK-based Vodafone Group regarding the potential merger of their respective operations in Italy. The deal would reduce Italy’s mobile market from five players down to four while also combining their fixed broadband operations. The proposal values Vodafone Italy as EUR10.45 billion (USD11.4 billion) and Iliad Italy at EUR4.45 billion.

Vodafone Group would obtain 50% ownership of the merged entity (dubbed NewCo) together with a EUR6.5 billion cash payment and a EUR2.0 billion shareholder loan. Iliad, meanwhile, would get 50% of NewCo together with a EUR500 million cash payment and a EUR2.0 billion shareholder loan.

As part of the proposed transaction, Iliad would have a call option on Vodafone Group’s equity stake in NewCo and would be able to acquire a block of 10% of the NewCo share capital every year at a price per share equal to the equity value at closing. In the event Iliad chooses to exercise the call options in full, this would generate an additional EUR1.95 billion in cash for Vodafone Group.

Based on Vodafone Italy’s estimated EBITDA after Lease (EBITDAaL) of EUR1.34 billion for FY 2024 (as per broker consensus), the proposed transaction implies an EBITDAaL multiple of 7.8x, which is higher than the 7.1x EBITDAaL multiple offered by Iliad in its EUR11.25 billion takeover offer for Vodafone Italy in February 2022, which was quickly rejected by Vodafone Group.

The merged business would be expected to generate revenues of around EUR5.8 billion and EBITDAaL of approximatively EUR1.6 billion for the financial year ending 31 March 2024.

Iliad says the financing of the transaction is supported by leading international banks and the deal has the unanimous support of its board of directors plus its main shareholder Xavier Niel.

Thomas Reynaud, Iliad Group CEO, said: ‘The market context in Italy calls for the creation of the most innovative telecom challenger, with ability to compete and create value in a competitive environment. We believe that the profiles and complementary expertise of Iliad and Vodafone in Italy would allow us to build a strong operator with the ability and financial strength to invest for the long term. NewCo would be fully committed to accelerating the country’s digital transformation and especially fibre adoption and 5G deployment, with more than EUR4 billion of investment planned over the next 5 years.’