Telenor Loves Its 'Cash Machine'

Norwegian national telco Telenor ASA (Nasdaq: TELN) is filling the fjords with ringtones and its coffers with cash, describing its mobile business as a "walking, talking cash machine."

Mobile is Telenor's biggest single revenue and profit driver, accounting for second-quarter revenues of NOK5 billion (US$657 million), up from NOK2.8 billion ($368 million) last year, and an operating profit of NOK830 million ($108 million), up from NOK482 million ($63 million) (see Telenor Posts Strong Q2).

Around NOK1.8 billion ($235 million) of this revenue jump is down to the consolidation of Pannon GSM Rt. in Hungary and Digi.com Bhd in Malaysia, but analysts were pleased with the 8.3 percent revenue growth in the home wireless business.

However, they don't quite share Telenor's "cash machine" appraisal. They want to see the telco sell its stakes in the lesser of its mobile businesses and further increase cashflow in its domestic operation, Telenor Mobile, according to Espen Torgersen, an equities analyst at Handelsbanken Securities in Oslo.

Things look pretty healthy at home just now, and Torgersen describes Telenor Mobile's increase in net customer additions (to 2.3 million subscribers), EBITDA margins, and average revenue per user figures (up slightly to $46 per month) as "pleasing" and "healthy."

And it is making greater efforts on its home patch. Telenor Mobile has already launched multimedia messaging services, though there are not enough handsets available just now for a mass-market launch. It is also controlling costs, upping its domestic EBITDA margins by three percentage points to 39.5 percent -- not bad in a market with nearly 80 percent penetration. Domestic mobile revenues were up 5 percent to NOK2.314 billion ($303 million).

But Torgersen says Telenor needs to generate more cash in Norway, because it currently gleans more than half its mobile revenues, but only NOK125 million ($16.4 million) of its operating profit, from emerging markets.

Several of Telenor's minority holdings are "divestment cases" in Torgersen's view. He reckons the operator should sell its 17.45 percent in Connect Austria (a.k.a. One) and its 18 percent in Cosmote in Greece; as for the 20 percent stake in Portugal's OniWay, "there is no reason to maintain this share."

A spokesman at Telenor would not comment on sales plans, saying only that "the strategy is exit or control, but that doesn't mean exit immediately" -- not too surprising an approach in the pits of a bear market.

What Telenor is likely to hold on to, and which could prove quite lucrative, are its stakes in overseas high growth markets, such as Bangladesh, where GrameenPhone (46.4 percent stake) has margins of 45.1 percent. And it has a 61.9 percent stake in Kyivstar GSM (see Telenor Controls Kyivstar GSM) in the Ukraine, a market with only 3.5 percent mobile penetration.

The carrier would like to boost its 53.5 percent stake in Danish operator Sonofon, but fellow shareholder BellSouth Corp. (NYSE: BLS) is believed to want up to NOK6 billion ($785 million) for its 46.5 percent, while Telenor is unwilling to pay anything near that amount for fear of damaging its credit rating.

While it is profitable and stable (78 percent government ownership and limited 3G exposure), Telenor's mobile business is a bit player on the international scene -- it has just 9.3 million subscribers in total. This compares with more than 100 million at Vodafone Group PLC (NYSE: VOD) and around 41 million at Orange SA. So will Telenor try to hitch its star to a bigger wagon?

Well, it has already been spurned by its near neighbors, Telia AB and Sonera Corp. (Nasdaq: SNRA), which are preparing to consummate their impending marriage. And the company is feeling rather independent. A spokesperson said Telenor "stands on its own solid feet… has a strong balance sheet," -- debt stands at $3.2 billion -- and that the only likelihood of the Norwegian government reducing its 78 percent stake is through a merger.

— Ouida Taaffe, special to Unstrung
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