Tele2 Lures Hutchison as Kinnevik Opens to Sale: Real M&A

Tele2 AB (TEL2B), Sweden’s second-largest telecommunications carrier, may be tempting Asia’s richest man with the chance to expand in Europe as the company’s controlling shareholder concentrates on faster-growing Internet investments.

Sweden’s Stenbeck family, which controls Tele2 through Investment AB Kinnevik (KINVB), has been investing more this year in online companies such as fashion retailer Zalando GmbH and e-commerce incubator Rocket Internet GmbH. After the sale of Tele2’s Russian carrier and Tele2’s unexpected loss and forecast reduction last month, Kinnevik Chairman Cristina Stenbeck may be warming to the idea of divesting one of her family’s largest holdings, said Kepler Cheuvreux, which estimates Tele2 may fetch as much as 42 billion kronor ($6.3 billion) in a sale.

Hutchison Whampoa Ltd. (13), owned by Hong Kong billionaire Li Ka-Shing, could gain critical size in Sweden and reduce costs by buying Tele2’s business there and combining it with Hutchison’s fourth-place Swedish carrier 3 Scandinavia, said Swedbank AB. The combined entity would control about 37 percent of the market, narrowing the gap with state-owned TeliaSonera AB (TLSN)’s 46 percent grip, according to data compiled by Bloomberg.

“I think Tele2 is on its way out of Kinnevik’s portfolio,” Bjorn Gustafsson, an analyst at Kepler Cheuvreux in Stockholm, said in a phone interview. “Stenbeck’s goal is to focus on building up the online part of the business, and selling the carrier’s Russian business shows she’s willing to sell the family jewels. She may have to sell Tele2 piece by piece, but selling won’t be a problem for her.”

Hutchison Interest

Shares of Tele2 rose as much as 1.8 percent and added 1.6 percent to 79 kronor at 9:13 a.m. in Stockholm.

Tele2 got 41 percent of its 7.5 billion kronor in revenue last quarter from its home country, where it began by challenging the state monopoly in the late 1970s. The Stockholm-based company also operates in Norway, the Netherlands, the Baltic region, Kazakhstan and Croatia, for a total of 13.2 million mobile-phone subscribers.

Hutchison, based in Hong Kong, wants to buy more telecommunications assets in the Nordic region, said a person familiar with the situation who asked not to be named because the plans are private. The company has evaluated a bid for Tele2, said another person.

Hans Leung, a spokesman for Hutchison in Hong Kong, declined to comment when asked if the company was interested in buying Tele2.

Home Market

Torun Litzen, a spokeswoman for Kinnevik, declined to comment on whether the Stockholm-based holding company would be willing to sell Tele2. Kinnevik owns about 30 percent of Tele2’s capital and controls about 48 percent of the voting rights, according to Kinnevik’s quarterly earnings report.

Tele2 Chief Executive Officer Mats Granryd said that Sweden is Tele2’s home market, when asked about the possibility of selling the Swedish operations.

“In the event of Swedish in-market consolidation, we will be on the buying side,” Granryd said in an e-mailed response to questions.

Kinnevik, the Stenbeck family’s publicly-traded investment vehicle, is building up its online portfolio with 2 billion kronor of investments this year. Online ventures now make up 30 percent of Kinnevik’s holdings, up from about 20 percent a year earlier.

It owns 36 percent of Germany’s Zalando, which saw its second-quarter revenue soar 70 percent to 437 million euros ($589 million). It also owns 24 percent of Berlin-based Rocket Internet and 31 percent of Avito, which offers online classified ads in Russia and is pushing into Ukraine, Morocco and Egypt.

‘Rapid Transformation’

“Kinnevik has gone through a rapid transformation in the past years,” Kinnevik CEO Mia Brunell Livfors said in the company’s Oct. 23 third-quarter report. “With the successful refocusing of our portfolio I am convinced that our strategy and market positions in growth sectors and growth markets will continue to deliver value to our shareholders.”

Kinnevik’s shares have jumped 76 percent this year through yesterday, giving the holding company a market value of 67 billion kronor. The stock, which reached a record high Nov. 7., rose less than 0.1 percent to 239.50 kronor in Stockholm.

Tele2 agreed in March to sell its Russian unit to VTB Group, the country’s second-largest lender, for $2.4 billion in cash, plus the assumption of debt. Tele2’s exit from Russia after 12 years followed the carrier’s failure to win a wireless license to run faster services in the country, leaving it with an outdated network.

Swedish Competition

Selling all of Tele2 for 42 billion kronor would represent a 19 percent premium to the company’s current market value. That would give Kinnevik proceeds of about 12.8 billion kronor, most of which would likely be returned to its shareholders, Gustafsson said.

“This would be a big win for shareholders,” he said.

Competition in Sweden has increased over the past few years as TeliaSonera, Telenor ASA (TEL), 3 Scandinavia and Tele2 compete for customers. Tele2, which has about 26 percent of the mobile-phone market, saw its third-quarter revenue in Sweden slide 3.4 percent, while its adjusted earnings fell 6.8 percent. The carrier cut its sales and profitability guidance for 2015, citing increasing operating costs and price pressure.

“Being an operator is a capital-intensive business with all the network investments and high marketing costs,” Mikko Ervasti, an analyst at Evli Bank Plc in Helsinki, said in a phone interview. “Three strong players would be better and would help lower costs for the carriers and maybe even the customers.”

Not Cheap

3 Scandinavia, part of Hutchison’s European telecom arm that’s co-owned with Investor AB (INVEB), is the smallest of the four Swedish carriers with about 11 percent of the market, according to data compiled by Bloomberg. Buying Tele2’s Swedish unit would help Hutchison leapfrog competitors in market share, said Sven Skold, an analyst at Stockholm-based Swedbank.

“It wouldn’t be cheap for them, but since 3 is so much smaller than the others, a deal would help them reduce capital expenditures-to-sales and gain subscribers,” Skold said in a phone interview.

Peder Ramel, the CEO of 3 Scandinavia, Hutchison’s mobile-phone operations in Sweden and Denmark, told Swedish daily Dagens Industri in an interview in May that the carrier may acquire operators in the two countries to improve profitability.

Erik Hornfeldt, a spokesman for 3 Scandinavia, said the company “sees a need for consolidation in the Scandinavian mobile market, certainly in Denmark but also in Sweden.” He declined to comment on potential targets.

Billionaire Bets

Hutchison is continuing to expand its presence in the European telecommunications space. The holding company already operates in the U.K., Austria and Italy and is battling regulators to win approval for its planned purchase of Telefonica SA’s Irish unit for as much as 850 million euros to create a carrier as big as the country’s current dominant operator, Vodafone Plc. Hutchison faces an in-depth probe by European Union regulators examining its bid for the unit.

Li isn’t the only billionaire betting that the European industry will get a boost if regulators drop their resistance to letting carriers combine across borders.

Carlos Slim, the world’s second-richest person, who controls America Movil SAB, has pushed the Mexico-based carrier into Europe with a stake in Telekom Austria AG and an almost 30 percent holding in Dutch carrier Royal KPN NV. U.S. cable magnate John Malone has already built up Europe’s largest cable operator with companies in 12 European countries, including the Netherlands, Germany and the U.K.

It’s inevitable that Hutchison’s 3 Scandinavia will participate in consolidation, as well, said Kimmo Stenvall, an analyst at Pohjola Bank Plc in Helsinki.

“Intra-market consolidation is an easy way to build shareholder value,” Stenvall said in a phone interview. “Three network operators is sufficient and the consolidator stands to win subscribers and cut operating costs and network investments.”

To contact the reporter on this story: Adam Ewing in Stockholm at aewing5@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Kenneth Wong at kwong11@bloomberg.net

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