Only Family Could Adore This $3.3 Billion Cable Deal
(Bloomberg Gadfly) -- Two very different telecoms upstarts -- Sweden's Tele2 AB and Com Hem Holding AB -- need to do something to win more customers and keep the ones they have. So they've opted for M&A, backed by the family-controlled Swedish investment giant Kinnevik AB that owns chunky stakes in both companies.
But investors are understandably skeptical that Tele2 will be able to deliver and retain the benefits of buying its smaller peer.
Tele2 on Wednesday agreed to buy Com Hem for cash and stock worth about 27 billion Swedish kronor ($3.3 billion) based on its previous closing share price -- or 37 billion kronor when adding assumed net debt. The strategic logic is sound. Tele2 is Sweden's number two mobile operator and Com Hem is a top pay-TV group and the number two broadband provider.
Combining is a jump on the convergence bandwagon, with the chance of offering services to entire households rather than just individuals and businesses. That should help the duo better challenge market leader Telia Co AB.
There aren't many overlaps given the pair's respective focus on mobile and fixed-line markets. Half the 900 million kronor of projected annual deal benefits come from revenue gains rather than cost savings. If all the synergies come through, the deal should generate an acceptable return on invested capital eventually, although the five-year timetable is painfully long.
In today's money the benefits could be worth about 8 billion kronor -- a 10 percent boost to the duo's total market capitalizations before the transaction was announced. Yet their combined value dipped slightly on Wednesday.
Sure, the deal isn't a new idea; the stock market may have priced in some of the upside already. Nevertheless, the poor reception casts doubt on whether the two really are better together.
Investors seem to be pricing in the full financial terms of the transaction -- cash and a small premium from Tele2 to Com Hem shareholders -- without accepting a brighter future. That's uncomfortable for Stenbeck family-controlled Kinnevik. It's invested on both sides, but more heavily in Tele2.
Is the market skepticism harsh? Perhaps not. Revenue wins are always hard to believe until they're delivered. Moreover, a stronger Tele2 may not be able to keep all the deal gains if Telia responds aggressively. It will take some time for this deal to work any magic on Tele2's share price.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.
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