Tele2 has agreed to sell its French unit to Virgin Mobile France for SEK 575 million (EUR 56 million) cash. The French MVNO had 429,000 customers at the end of June. The transaction raises a number of questions, such as why is Tele2 selling the French activities and could the company be planning to sell other activities.
It's clear that Tele2 has been scaling back its operations to a limited number of European countries, mainly those where it can still rank among the largest operators. The focus is on providing mobile services over its own infrastructure. Core countries include then Sweden, Norway, the Baltic states, Russia and Croatia. The Netherlands can also be considered a core market, given the good financial performance and extensive fixed network infrastructure, even though the Tele2 mobile service is provided as a MVNO. This could change though if the company decides to participate in the Dutch 2.6GHz auction next year.
With the French divestment, the number of countries where Tele2 has withdrawn reaches 11. Previously the company sold its activities in Denmark (to Telenor, May 2007), Portugal (to Sonaecom, June 2007), Hungary (to HTCC, July 2007), Belgium (to KPN, August 2007), Spain and Italy (to Vodafone, October 2007), Luxembourg and Liechtenstein (to Belgacom, June 2008), Poland (to Netia, June 2008) and Switzerland (to Sunrise, September 2008).
The French market was an exception for Tele2 as only mobile services were offered, and then via a MVNO. The Tele2 fixed and broadband activities in France were already sold in 2007 to SFR. Looking at the French MVNO, the initial reaction is the low price paid by Virgin Mobile - just 0.47 times 2008 sales. With 429,000 customers, the unit is valued at SEK 1,340 (EUR 130) per subscriber. This assumes that only the subscribers will transfer to Virgin. Given the capex is reported as zero in France, one can assume that no network assets are involved in the sale.
The number of Tele2 customers in France increased by just 15,000 in 2008 and the MVNO lost 25,000 customers in the first half of this year. ARPU did show an improvement, from SEK 619 in Q1 2008 to SEK 732 in Q2 2009. In short, the takeover price per customer is equal to just two times the quarterly ARPU. EBITDA also showed an improvement over this period, from a loss of SEK 36 million in Q1 2008 to a profit of SEK 41 million in Q2 2009. This aside, the French contribution to Tele2's cash flow, with such a low EBITDA, was minimal. Given the dominant network operators in France, there was sufficient reason to sell the activities.
One can assume that Virgin Mobile likely values the subscribers substantially higher than the EUR 56 million it's paying. Virgin can allow itself to bid low, as it's a buyer's market. The takeover further shores up its subscriber base if it decides to go ahead with a bid for the fourth mobile licence in France. The company has already confirmed it's talking to cable operator Numericable about a joint bid in the auction, for which offers are due at the end of this month.
The other countries where Tele2 has a limited market position are Austria and Germany, where it offers fixed telephony and fixed broadband. The MVNO in Austria was already sold to Telekom Austria in October 2007, but Tele2 is also active there as an unbundler. If we look at the EBITDA margins in these countries, they are both running just near the recently announced profitability targets at Tele2. Tele2 defines core activities as those with a margin of at least 20 percent; Germany is at 19.7 percent and Austria 21.0 percent. This suggests that a sale is not on the cards in the near future, but the fact remains that there are no mobile activities in either country. If Tele2 does decide to sell, it will have to settle for a low price. With the same multiple as it received for the French activities, putting aside what kind of assets are included, the German unit would sell for EUR 134 million and the Asutrian activities for EUR 99 million. Who would bid?
The conclusion is that Tele2 France was too small for the group, Tele2 Netherlands has found a solid position alongside the other core activities and only Germany and Austria could still be on the for-sale list.
