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TELECOMS AND SOFTWARE NEWS
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Agent of consolidation Orange makes Sunrise in Switzerland
Steven Hartley
Agent of consolidation Orange makes Sunrise in Switzerland
Orange and TDC have agreed to combine their Swiss operations. Orange will make an initial payment of €1.5 billion to TDC for a 75% stake in the combined entity, but the deal allows Orange to buy TDC's 25% stake later. The deal is expected to close in February 2010, subject to regulatory clearance.Clearance may be subject to Swisscom approval
The first thing to note about this deal is that, upon completion, the Swiss mobile market will consist of just two players, Orange and incumbent Swisscom. This should be enough to concern Swiss regulator ComCom and the Competition Commission (Comco), since Swisscom's market share is well above the European average for an incumbent. However, Swisscom has a history of tying ComCom in legal wrangles (particularly over interconnect and unbundling fees) in order to protect its market position, which the regulator has had difficultly in resolving. Indeed, concerns about Switzerland's regulatory framework ultimately prompted MVNO Tele2 to exit the market in 2008.It wouldn't be surprising to see Swisscom itself challenge the deal, ironically on the basis of it being anti-competitive. Although we doubt such a move would be successful in the long term, it could be used as a delaying tactic and disrupt the proposed timescale and synergies.Orange increases its role in European consolidation
If completed, this deal is yet another signal of Orange's intent to take a leading role as an agent of consolidation in Europe. It follows the combination of its UK operations with those of T-Mobile in September and suggests similar announcements will follow. Poland and Romania look most likely, with six and five mobile network operators respectively. The deal's structure is also interesting. As in the UK, it is not an outright purchase, at least from the outset. Orange has the option to purchase TDC's stake, but it is another sign that Orange is taking a pragmatic approach to M&A - undoubtedly a reflection of the more challenging financial environment. It also signals the form that consolidation is likely to take over the next couple of years. The era of megalomaniacal purchases is being replaced by negotiation, compromise and cooperation.TDC finally offloads Sunrise, so NTC can offload TDC
For TDC the deal signifies the beginning of the end of its relationship with 88% stakeholder Nordic Telephone Company (NTC). NTC is the consortium consisting of private equity heavyweights Apax Partners, Blackstone, KKR, Permira and Providence, which bought its stake in 2005 in a €13 billion leveraged buyout. On 23 November NTC announced an evaluation of 'strategic alternatives for the company', which appears to be thinly veiled code for a sale or IPO. The removal of Sunrise from the TDC equation, which has been an underperforming thorn in TDC's side for some time, can only make TDC more attractive. Indeed the Swiss deal was foreseeable in a quote from Permira co-managing partner Kurt Bjorklund following the announcement of NTC's strategic review: “the goal of focusing the company on the Nordic region, as we set out to do, is now well advanced”. Without Sunrise, it is even more so.Combination allows Orange to challenge Swisscom
The Orange/Sunrise combination will have a total of 3.4 million connections, still smaller than Swisscom's 5.5 million connections. However, considering that Sunrise had the larger customer base going into the deal, Orange will have a sizeable customer base on which to mount a strong challenge to Swisscom's mobile dominance. The combined company will also have 1.1 million fixed customers, compared to Swisscom's 3.5 million. There is still a long way to go before Swisscom will feel too threatened, but Orange is more aggressive than most in fulfilling its desire to be an integrated player so will be able to bring its experience to bear.As usual, there are financial benefits of consolidation, particularly on the mobile side. Orange claims that the merger will reduce the anticipated number of base stations planned by the separate entities by a third. This in turn translates to cost savings, estimated at €376 million in capex between 2010 and 2015, and opex savings of €132 million per year. Orange is therefore in an excellent position in the Swiss two-horse mobile race, if not the fixed.
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