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Wednesday, August 02, 2006

Tele2: Feeling the Pain

Tele2 is really suffering and I suspect that Kinnevik who own 28.3% (as well as 38.3% of Millicom who have already reported) is being dragged down by the poor performance. Tele2 reported a drop in net profit from 676SEK to 246SEK y-o-y, which together with a cash outflow after capex of 383SEK spells a lot of trouble for the company.

Historically, Tele2 used the cashflow from the Swedish mobile operator, Comvig, to expand into mainline Europe. It built up a huge set of revenues and smallish profits reselling voice minutes cheaper than the regulated incumbents in big European Markets (eg Germany, France, Italy, Spain, UK, Poland) and occasionally bought some infrastructure assets eg. Baltic Mobile Operations. This plan was working well until LLU and VOIP players meant that the typical arbitraging reseller was no longer the cheapest game in town. So, Tele2 has basically spent the last year trying to remodel its’ business model.

Tele2 is trying to do three expensive things at once:
- replace fixed reseller revenues with direct access and LLU business
- build a MVNO Mobile business in certain markets
- expand into Russia

I think Tele2 is trying to do to much and this could potentially bring the whole mini-empire to its’ knees. If I was in charge of Tele2, I’d certainly be thinking of withdrawing from the whole of UK&Benelux & Souther Eurpe and possibly Central Europe. This would leave the company focussed on Nordic & The Baltics with Russia as the growth driver.

millicom tele2 year-to-date

Kinnevik are obviously thinking about how to reshuffle its’ pack of cards with the recent aborted sale of Millicom. The performance of the shares has not been awe-inspiring this year. If a sale of Tele2 is being considered, I suspect that the only people who would be interesting in buying Tele2 would be someone who was willing to do a break-up, something that Kinnevik should be more than capable of doing itself. Telecoms (via Tele2 & Millicom) account for more than 50% of the asset value of Kinnevik and they need to do something sooner rather later before more value is destroyed.