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To: Eric L who wrote (19179)	3/27/2002 2:34:36 PM
From: Eric L	Respond to of 34857

re: ARC on the Telia/Sonera Marriage >> Europe’s first marriage of incumbent operators looks likely to happen without at least one partner deserting at the altar. In a drive to counter stagnation in its domestic market, Telia has bid €7.5 billion for Finland’s Sonera. The all share deal will create cost saving synergies but more importantly it will also increase the exposure of Telia’s balance sheet to its primary source of growth – wireless. In exchange, Sonera finds a home that can manage its €3.3 billion debt. The smaller Scandinavian incumbents, Telenor and TDC, are now in vulnerable positions and may soon fall to this Northern European axis. Telia and Telenor, KPN and Belgacom, KPN and Telefonica. Mergers between European incumbent telcos have had a tough history. Sonera and Telia have been courting now for some time, but in the past political issues have precluded any deal. These would now appear to have been cleared aside for a Telia offer of 1.5144 shares for each Sonera share, an approximate 15.8 percent premium on Tuesday’s closing price and lower than that anticipated by many analysts. Telia shareholders will hold approximately 64 percent of the combined company. The deal will create the eighth largest European telco which would have generated 2001 revenues of €9 billion. It will be the single dominant operator in Scandinavia and the Baltic States with 8.1 million mobile subscribers and 7.6 million fixed-line subscribers. In addition, associated companies add an expected 14.6 million and 1.2 million mobile subscribers and fixed-line subscribers respectively. The deal is expected to generate annual cost savings of around €300 million by 2005, rising from €150 million in 2003 and €225 million in 2004. This will come from the planned divestiture of the loss-making Telia Finland, reductions in the cost of servicing fixed and wireless networks and reduced purchasing costs across the group. Critics of the deal however have called into question the whether these projections are realistic. Purchasing cost savings will take time to show on the balance sheet, the large government holdings make sweeping cuts in the labour force politically very complicated, and there is little overlap of the two parties’ networks, both fixed and wireless. By these criteria alone, the deal doesn’t look so sweet. However this merger proposal is not just about synergistic cost savings, but also about securing future avenues for growth. Like Deutsche Telekom and France Telecom (see last week's BluePrint) this is determinedly no longer domestic fixed telephony, but wireless operations. Domestic fixed line telephony accounted for 50 percent of Telia’s 2001 revenue, but declined 2 percent on the previous year. By contrast, Telia Mobile grew 33 percent in 2001 and contributed 29 percent of overall group turnover. However, again the domestic market was a weakness, growing by just 6 percent. While both companies are at the forefront of developing commercial services to push average revenue per user, notably wireless LAN services via Telia HomeRun and Sonera wGate, in the immediate to medium term this will have only a moderate effect on their balance sheets. For Scandinavian telcos, operating in one of the most saturated cellular markets in the world, expansion into new markets is key. This is where the deal begins to look exciting. Telia Sonera will have interests in 22 national mobile markets globally (see chart) including most of Scandinavia and the Baltic States. The combined group will hold 60 percent of Latvian Mobile Telephone, 55 percent of Omnitel in Lithuania, and 49 percent of Eesti Telekom in Estonia, all leading operators in their markets. In addition it will have a controlling stake in Russia’s only national operator, Megafon. While these markets will generate lower ARPU, their immaturity leaves plenty of room for growth. In Russia, with a market at just 2 percent penetration, there are some 14.5 million potential subscribers waiting to be acquired by an operator. The situation is not dissimilar in Turkey where Sonera has a 37 percent stake in the number one operator, Turkcell. Telia Sonera will also hold a share of 3G licenses in three of Europe’s top six wireless markets – Quam in Germany, Ipse in Italy and Xfera in Spain. It was largely through the these acquisition of these licenses that Sonera racked up its €3.3 billion of debt, but because of Telia’s strong debt position, the combined entity will still have one of the lowest telco gearings around. The smart money is on this deal going to completion. There is reportedly a strong tide of political will for this to happen and the cultural issues that have dogged other attempts of this kind appear to have been resolved, at least publicly. Already the proposed chairman of the group, Tapio Hintikka, has begun to address the next item on the agenda, finding the next partner for the group. With Telia Danmark loosing cash and Sonera contributing little on the Danish front, TDC would seem the next sensible port of call. << - Eric -