Carrie Pawsey
Tele2 continues to divest for profitability
Tele2 has announced this morning that it is to divest its Danish mobile and broadband operations to Telenor and is selling its Italian calling card business C3 to Etelia SPA. The Danish operations will be sold for DKK 835 million (€112 million) and the C3 sale is for an undisclosed amount. The deals are expected to be concluded around July, subject to the relevant regulatory approvals.Comment: Both Tele2 and Telenor have recently announced their Q1 2007 results. Tele2 needs to continue improving its profitability. The Danish operations provided revenues of DKK 1,366 million, but with an EBITDA of DKK 55 million this equated to an EBITDA margin of just 4%. Similarly the Italian C3 operation provided revenues of SEK 1,283 and an EBITDA of SEK 40 million, thus providing an EBITDA margin of just over 3%. Neither of these businesses were going to help profitability in the short term. Tele2's strategy going forward is to retrench, with CEO Lars-Johan Jarnhiemer stating it will 'focus on our core businesses and geographies'. Some would argue that Denmark, as a Scandinavian country, is a core geography and mobile and broadband are certainly where its growth is coming from. However, going forward we expect to see a greater focus on the Baltics and Russia, and continued divestments in markets like Benelux, France and Central Europe.For Telenor this deal is simply a case of buying market share. As the owner of the number two mobile operator Sonofon, the purchase of Tele2's 227,000 mobile customers is about moving these customers to a direct channel. Tele2 was an MVNO hosted on the Sonofon network so effectively it already had wholesale revenues from the traffic. This deal means that Telenor now owns the customer relationship and more importantly increases its market share from 23% to 27% (as the regulator publishes subscriber figures broken down by MNO/service provider and MVNO). Interestingly 44% of the Tele2 mobile customers were postpaid, which would have commanded a slightly higher premium on the price than if it was to buy one of the low cost MVNOs.On the broadband side, Telenor bought Cybercity back in May 2005 for DKK 1.4 billion and at the time it covered 70% of the population with its own infrastructure and had around 8% market share. The acquisition of Tele2's 75,000 broadband customers means that Telenor will now have increased its market share from its current 10% to 14%. Tele2 states that its broadband customer base is mainly high end consumer, home office and SME which would indicate a higher revenue customer. In addition, Telenor also inherits 206,000 fixed line subscribers. However, with the availability of naked DSL in Denmark we would question the long term value of this part of the business. So overall was this a good deal? When considering that in total Telenor inherited 508,000 subscribers (227,000 mobile, 75,000 broadband and 206,000 fixed) this equals a price of around DKK 1,643 (€220) per subscriber which doesn't seem an extortionate amount to us, provided Telenor can gain cost efficiencies and thus increase profitability.
