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Stock Strategist Industry Reports

Iliad: The Storm Before the Calm

After the upstart firm's grand entrance, the French wireless market is returning to normal, leaving incumbent players France Telecom, Vivendi, and Bouygues with the lion's share of upside.

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Iliad (ILD) had the fastest start on record for a fourth entrant into a wireless market, demonstrating the risk that this fledgling firm poses to France's existing operators  France Telecom (FTE),  Vivendi (VIV), and  Bouygues (EN). In its first quarter of existence, Iliad added 2.6 million subscribers. France's Big Three wireless firms prepared for Iliad's aggressive launch by offering SIM-only plans and reduced pricing, but their results still were dwarfed by Iliad's.

However, while this performance was exceptionally good, it is not reflective of what we expect to see going forward. The SIM-only business--in which a customer pays for a SIM card to get service only, bypassing the cost of a new phone-- accounted for less than 5% of the entire French wireless market at the end of the first quarter. While we expect this segment to grow faster than other wireless divisions, the other operators' market shares still dominate. We think the market is too focused on the SIM-only aspect and not the total share held by France Telecom, Vivendi, and Bouygues. So despite recently reducing our fair value estimates on these three incumbent operators (to EUR 19, EUR 22, and EUR 43, respectively), we continue to rate them as buys, with France Telecom remaining our favorite.

Allan C. Nichols does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.