Tele2 Netherlands: time to buy or be bought

Thursday 14 July 2016 | 16:36 CET | Market Commentary
Consolidation has reduced the Dutch market to six national players of significant size: KPN, Ziggo, Vodafone, T-Mobile, Tele2 and M7. With the planned merger of Ziggo and Vodafone, smaller players will find it even harder to compete. T-Mobile has chosen a mobile plus OTT strategy in order to take a clear position in the market. This underlines even further how far behind M7 and Tele2 are in terms of scale and margins. For Tele2, it's time to take some drastic steps - it's either buy or be bought. 

Speculation is already rife that T-Mobile could be up for sale, and the same would be not much surprise for Tele2 given its financial performance. In absolute terms, Tele2 is a small player, with market shares of just a few percent. Despite its ambitions, its revenue growth is modest (+3.7% in Q1). The EBITDA margin, capex margin and free cash flow have all reached new low points.

Tele2 Group: attractive for cable operators

Tele2 Group has been falling behind in the consolidating European market. It has withdrawn from a number of countries already, including France, Luxembourg, Liechtenstein, Poland, Switzerland, Russia, Norway and in part Kazakhstan. What remains in Sweden, the Netherlands, the Baltic states, Croatia, Germany and Austria. Its focus is on Sweden, the Netherlands and the Baltics.

The scope of the group calls for action. It is far from a 'pan-European' operator, and there is little geographic synergy in its portfolio. In terms of scale, Tele2 is still far behind the major European players. The Dutch subsidiary generated EUR 155 million in revenue in Q1, equal to 22 percent of group revenues, while Sweden accounted for 47 percent of the total. In comparison, KPN recorded EUR 1.7 billion in sales in the same period. Tele2's strategy is mobile-first, complemented by fixed services where possible (mainly the Netherlands). This has left Tele2 far behind in the trend towards fixed-mobile convergence. Mobile-only is still a feasible strategy, but offers a relatively small market opportunity, especially in crowded markets like the Netherlands, where T-Mobile is already leading on mobile-only. The Tele2 activities could prove attractive takeover targets for cable operators though, such as Com Hem in Sweden.

Netherlands: buy or be bought

At first glance, a sale of Tele2 Netherlands appears unlikely:

  • The Netherlands is its second-largest operation (after Sweden, which is mobile-only but did recently buy a fixed network for business services). Various takeovers (Versatel, BBned) have helped grow the Dutch business.
  • Tele2 NL is following the standard Tele2 'ladder of investment': it started with carrier (pre)select services, acquired Versatel for fixed and business services, built its own mobile network and fixed core network. To abandon the Netherlands would suggest a failure of the Tele2 model.
  • According to management: "We're buyers, not sellers".

Nevertheless, Tele2 has realised the original ambition of its name - number 2 in the market - only in Sweden and the Baltics (third in Estonia). It is far from such a position in the Netherlands, where it ranks fourth (and last) on the mobile market, with a big gap with its nearest rival.

Desperate times call for desperate measures. Either buying another operator (T-Mobile, if regulators allow it) or selling out (plenty of candidates) appears unavoidable. 

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