Tele2 Sets M&A Ball Rolling

Tele2 acquires its way into the facilities-based sector with deals that could spark further M&A activity in Germany

July 18, 2005

6 Min Read
Tele2 Sets M&A Ball Rolling

Pan-European service provider Tele2 AB (Nasdaq: TLTO), best known for undercutting national incumbents by reselling fixed and mobile voice services, has just spent €1.6 billion ($1.9 billion) buying facilities-based operators in Western Europe in a bid to own access infrastructure in key broadband markets.

Late Thursday the Swedish carrier announced its €257 million purchase of Spanish competitive operator Comunitel Global SA, a small but growing broadband competitor to incumbent operator Telefónica SA (see Tele2 Buys Comunitel in Spain).

Then today Tele2 announced it has offered €2.20 per share in cash, or €1.34 billion ($1.62 billion) in total, for Versatel Telecom International N.V. (Amsterdam: VRSA), which operates networks in the Netherlands, Belgium, and Germany and has 1 million customers (see Tele2 Makes Offer for Versatel).

As Versatel has about €230 million ($278 million) in cash on its balance sheet, the net value of the deal is €1.13 billion ($1.36 billion).

That news sent Versatel's share price soaring by 24 cents, more than 12 percent, from Friday's closing price of €1.93 to €2.17 in morning trading on the Euronext Amsterdam stock exchange. Tele2's share price edged up by 1 percent to 78 Swedish Kroner on the Stockholm exchange.

Tele2, though, is only keen on Versatel's Dutch and Belgian businesses, where it can achieve economies of scale and bolster its competitive position by combining Versatel's subscribers and network assets with its existing customer base. So should the deal close, as expected, in October, Tele2 has agreed to sell the German operation to private equity firm Apax Partners for €565 million ($682 million).That, in turn, could spark off some major consolidation in Germany, as Apax sees an opportunity to create a telecom service powerhouse that could challenge the national incumbent.

Apax partner Torsten Krumm told French news agency AFX that the private equity firm plans to merge Versatel's German business with Tropolys GmbH, a local carrier based in Dusseldorf in which Apax invested in 2000.

Apax also owns a stake in Kabel Deutschland GmbH, Germany's largest cable operator (see Cisco Wins German Cable VOIP Deal and Analyst: Germany Needs Cable Merger).

Krumm also told AFX that Apax might bid for Deutsche Telekom's main fixed-line competitor, Arcor AG & Co. KG, currently owned by mobile giant Vodafone Group plc (NYSE: VOD).

Arcor, which sells voice and data services to the business and residential markets, has an annual turnover of more than £1 billion ($1.75 billion) and nearly 500,000 broadband customers, so would command a multi-billion dollar price tag.

Vodafone says it has no immediate plans to sell Arcor, but a spokesman notes that as it is a fixed-line business, "it's a non-core asset," though he couldn't say what sort of bid would be attractive to the mobile operator.

However, any such bids are dependent on the backing of Versatel's shareholders for the Tele2 offer, and rival bids are possible in the coming months.During a conference call this morning Versatel's management admitted that higher rival bids from other carriers or private equity firms were "a possibility, but we don't want to speculate about what could happen -– we want to talk about this agreement. Our companies have the same strategy. We are both attacking companies."

Should the takeover go according to Tele2's plans, though, it would give the Swedish company a significant additional presence in northern mainland Europe.

In its official statement, and in a conference call this morning, Tele2 made it clear that its growth strategy is based on owning access infrastructure, a shift from its past focus on being a virtual operator. The carrier is "pursuing its strategy of backward integration into infrastructure in markets where it has a critical mass of customers. Owning local access infrastructure is increasingly important in the growing ADSL market to ensure higher margins on access, better control of customers and ability to deliver higher margin services," it noted in a prepared statement.

It also hopes to learn from Versatel's existing triple-play plans and trials, and take that experience into other territories. "Tele2 fully endorses Versatel’s triple play strategy and will aim to leverage this expertise to later introduce these services in other core markets," the company noted.

So does Tele2 need to join the facilities-based gang to successfully compete with the big guns? Not necessarily, believes Heavy Reading senior analyst Graham Finnie, who recently penned a report on the European broadband market (see HR Tracks Europe's Need for Speed). "I can't see why you have to own infrastructure. It all comes down to cost, and what is the most economic approach. Each market and each case will be different -- it depends what the service provider is trying to achieve. You can't generalize and say it's vital to own your own DSLAMs."

Finnie adds: "That's not to say Tele2 isn't doing the right thing. Its management team will have reached its own conclusions. They're getting an extensive optical network, so that will help with their traffic costs, and Versatel will give them significant brand recognition in the Netherlands and Belgium."

Tele2's bids are the latest moves in a rapidly consolidating European fixed-line services market that is pitching the traditional national operators against increasingly aggressive and acquisitive competitors, with broadband access the key driver (see Europe Is M&A Feverish ). With their majority ownership of the continent's copper infrastructure, Europe's incumbents have had an inherent advantage over their competitors, despite attempts by central and local regulators to create fair market conditions.

But now alternative players such as Tele2, Italy's FastWeb SpA, Iliad's (Euronext: ILD) 'Free' business and Neuf Telecom in France, and Cable & Wireless plc (NYSE: CWP) and Easynet Ltd. in the U.K., to name just a few, are causing those incumbents problems as they unbundle the local loop, offer challenging bundles of services, including video and TV, announce aggressive network expansion plans, and combine their assets to create larger businesses that will be tougher to beat off (see FastWeb Unveils Expansion Plan, French Carriers Announce Merger, Iliad Ups Profits in 2004, C&W Has $150M Broadband Plan, Easynet Plans UK Expansion, and Unbundling Heats Up in UK).

And the incumbents have been busy bolstering their capabilities and expanding outside their national borders too (see Italians Prep Big French DSL Rollout, Telenor on Billion-Dollar Spree, T-Online Makes Spanish Acquisition, and Eurobites: Big Guns Fire Salvos).

Versatel, which has been seeking a buyer for some months, admitted it couldn't continue to compete with the national operators on its own. It has held acquisition talks with Belgium's national operator Belgacom (Euronext: BELG), and last week was forced to deny it had been courting Deutsche Telekom AG (NYSE: DT). (See Versatel, Belgacom Talks End .) "Given the consolidation that is taking place in the telecommunications market in Europe and the continued requirement for economies of scale, Versatel believes that it would strongly benefit from the combination with Tele2’s operations in Belgium and the Netherlands, and from Apax’s support in the continued growth of its German operations," the company noted in its statement.

— Ray Le Maistre, International News Editor, Light Reading

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