Tele2 increases focus on Baltic area, takes first step for convergence in Swedish market

Wednesday 10 January 2018 | 14:35 CET | Background

Tele2 has agreed to acquire Com Hem, a Swedish cable operator covering 60 percent of the population. After deals in Kazakhstan, Austria and the Netherlands, Tele2's focus has narrowed to the Baltic Sea area. Cable and mobile operators complement each other well, as we've already seen through mergers in other countries (Germany, Belgium, Netherlands, France, Spain, Portugal). Notably Tele2 did not previously see the need for fixed-mobile convergence in Sweden, due to the local market conditions. It's now changed stance and is ahead of the curve on the Swedish market, talking of 'untapped customer demand'. The expected synergies still appear somewhat limited. 

Pan-European dream over, focus narrows to Baltics

The proposed merger with Com Hem shows Tele2 Group choosing clearly for its home market Sweden. Its mobile operations in the Baltic states also fit this strategy, and a takeover of a fixed operator there likely won't take long. Notably Tele2 sold in the past its fixed activities in Sweden and Lithuania. More recently it acquired the business of TDC Sweden. Other countries have been divested completely in recent years, including Norway, Russia, France, Switzerland, Poland and Luxembourg. A sale of the remaining businesses in Germany and Croatia appears logical. Other recent deals include hiving off the Kazakhstan mobile business in a 50-50 joint venture, selling the Austria operation to 3 Group, and the planned sale of the Dutch business to T-Mobile (for cash and a 25% stake).

In short, little is left of Tele2's dream of becoming the pan-European challenger (from where its name comes). The numerous management changes appear to confirm the disappointment of majority shareholder Kinnevik (Stenberg family). So does the decision for Com Hem CEO Anders Nilsson to replace Allison Kirkby at the head of Tele2 group after the merger. 

Early attempt at convergence, limited synergies

The new Tele2 has pro forma annual revenues of SEK 31.8 billion and EBITDA of SEK 9.2 billion. Sweden accounts for 72 percent of revenue and 78 percent of EBITDA. In Sweden, Tele2 and Com Hem would have a combined market share of 28 percent in mobile, 22 percent in fixed broadband and 39 percent in digital TV. 

The expected revenue synergies of SEK 450 million per year are worth just 1.4 percent in extra revenue. This is a consequence of being the first mover, as fixed-mobile convergence has yet to take off in Sweden. 

The main points of the proposed merger are:

  • Com Hem shareholders will receive SEK 6.6 billion cash (EUR 674 mln) and a 26.9 percent stake in the merged group. That's equal to SEK 146 per share, of which SEK 37.02 in cash and the rest in Tele2 B shares, and a 12 percent premium on the last traded share price. Kinnevik will own 27 percent of the new Tele2 and have 42 percent of the voting rights. 
  • Tele2 will apply to the European Commission for regulatory clearance and hopes to complete the deal before the end of 2018. The company said it's "... prepared to effect pro-competitive measures if required to complete the merger". This acknowledges the merged company's significant share on the TV market. 
  • Expected synergies total SEK 900 million (EUR 92 mln), half from costs (mainly opex but also capex) and half in revenues. These should be fully realised within five years. 
  • Integration costs are estimated at SEK 600 million. Top staff will receive a retention bonus equal to 12-24 months salary. 
  • Com Hem CEO Anders Nilsson will replace Allison Kirkby as CEO.
  • Concrete financial targets include increasing shareholder remuneration and maintaining the leverage at around 2.0-2.5x EBITDA, although this will be slightly higher (2.8x) to start. 

The rationale of the merger is based on the complementary businesses, which lays the groundwork for the expected synergies. Customer satisfaction and loyalty also should increase, and the group activities will be more diverse. There are also benefits of scale. 

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