Tele2 Falls as Morgan Stanley Cuts View on Low-Cost Competition

  • Management growth targets of 2%-3% deemed ‘too ambitious’
  • Marketing initiatives at Tele2 ‘have struggled for traction’

Tele2 AB, the mobile-phone carrier controlled by Sweden’s Stenbeck family, fell the most in three weeks after Morgan Stanley downgraded its rating on the stock, citing intensifying competition at the low-price end of the domestic market.

Morgan Stanley lowered Tele2 to underweight from equalweight and set a price target of 66 kronor, saying management’s goal of mobile revenue growth of 2 percent to 3 percent in Sweden is “too ambitious” given pressure in the value segment of the market. Tele2’s “fighter brand” Comviq competes with the Hallon offering from CK Hutchison Holdings Ltd.’s Three.

“Three has a particularly attractive promotion, which we think could weigh on Tele2’s upcoming results,” the analysts wrote. “Tele2 has also found that some of its new marketing initiatives have struggled for traction.”

Tele2 dropped as much as 4.2 percent, the steepest intraday decline since May 25, and was trading 4.1 percent lower at 68.30 kronor as of 11:27 a.m. in Stockholm, valuing the company at 31 billion kronor ($3.7 billion).

Stockholm-based Tele2 has placed greater focus on its domestic operations in recent years and and on rolling out fourth-generation services in the Netherlands, while exiting businesses Russia and Norway. In Kazakhstan, where Tele2 formed a partnership with a rival, the operating environment remains “challenging,” Morgan Stanley said, citing higher competition, a deteriorating foreign exchange rate and a weaker macro economic environment.

In the Swedish business market -- where Tele2 has an estimated 50 percent share of small to medium-sized enterprises -- competition is increasing from Telenor ASA, the Morgan Stanley analysts said.

Tele2’s position as Dutch challenger got a major boost when the company acquired spectrum in the 800 megahertz band for “extremely favorable terms,” according to Alex Wisch, an analyst with Bloomberg intelligence. It’s investing heavily in deploying its own network in the Netherlands, and capital spending there has been consuming about half the company’s investments since 2013.

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