Market Watch

TDC Sells Swiss Fixed and Mobile Operations to Private Equity Firm



Danish incumbent telco TDC has sold Sunrise, its consumer-facing fixed telephony, broadband and mobile operation in Switzerland, to private equity firm CVC Capital Partners for CHF3.3bn (€2.5bn). The transaction involves 2.9m total subscribers, including 0.3m to broadband services. Completion is expected by Q4 2010 pending regulatory approval.

The sale follows a failed bid by incumbent telco France Telecom to buy the operation in June 2010; the attempt was blocked by the Swiss Competition Commission (ComCo) on the grounds that it would create a duopoly in the mobile market.

Analysis
With the sale of Sunrise, TDC has completed the disposal of its international consumer assets, to focus resources and investment in its core domestic operations; however, the telco still provides fixed and mobile services to businesses throughout the Nordic region. One example of investment in Denmark is YouSee, TDC's cable ISP, which has upgraded its network to DOCSIS 3.0, marketing speeds of 50Mbit/s to over 1.1m homes (77% of footprint).

The disposal of Sunrise allows the majority owners of TDC, the private equity consortium NTC, to move ahead with an initial public offering (IPO). Recent divestments in the run-up to the IPO include the sale of TDC's stake in Hungarian telco Invitel in Q3 2009 and the disposal of Baltic mobile operator Bité in 2007.

In Q2 2010, Sunrise took a 12.4% share of the retail broadband market, lagging behind incumbent telco Swisscom (55.1%) and cable provider Cablecom (17.9%). The ISP has struggled to organically grow broadband market share, looking to boost share in Q4 2008 with the acquisition of Tele2. By contrast, the incumbent telco Swisscom has increased its share of the market every quarter for the last five years, from 38.3% at year-end 2004 to 54.3% at year-end 2009.

In addition to facing strong competition from the Swisscom and the leading cableco, ISPs like Sunrise have found it increasingly difficult to grow subscriber bases given that the Swiss broadband market is relatively saturated. At end of 2009 broadband penetration in Switzerland reached 66.4%, versus a Western Europe average of 56.0%. As broadband penetration rises, this leaves less homes offline and means ISPs need to look more at expanding subscriber bases by encouraging subscribers to switch from rivals.

The relatively late introduction of local loop unbundling (2007), which enables independent DSL ISPs to cut ongoing fees paid to the incumbent telco to provide broadband, has helped Swisscom and Cablecom to maintain a strong hold on the broadband market. Late LLU adoption, coupled with a relatively lax regulatory environment, has contributed to comparatively weak competition in the DSL market.

Sunrise itself lodged a complaint in 2007 against Swisscom to the telecom regulator, the Federal Communications Commission (ComCom), after which the incumbent was ordered to provide bitstream access at regulated prices; Swisscom did not accept the decision until a court case two years later upheld ComCom's ruling. In March 2010, ComCom ordered Swisscom to cut leased line and Ethernet services - some of which are used to provide backhaul to DSL subscribers. The incumbent is currently challenging the ruling which is pursuing retroactive cuts of up to 30% going back to 2007.

The relative lack of competition in the Swiss broadband market has meant that while broadband penetration is high, speeds are low and prices high in comparison to other European countries. The average advertised speed in Switzerland reached 4.6Mbit/s in 2009 for all access types, compared to 10.5Mbit/s in Western Europe. At the same time point, monthly broadband ARPU was €26.60, whereas Western Europe averaged €15.90.

The high ARPU is partly explained by a comparative lack of broadband sold in bundles (which drives the effective price of broadband down). Comcom reports that only 5.7% of the Swiss population took broadband, mobile or fixed telephony as part of a bundled package. More competitive broadband markets such as UK, France and Germany, claim significantly higher rates of bundling - in the UK for example, the telecoms regulator Ofcom found that 48% of households took a bundled broadband, voice or TV service in Q1 2010; in Spain bundling accounted for 91.8% of total broadband packages in Q4 2009 according to the telecoms regulator CMT.

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