Market Insight

Tele2 and Com Hem to create combined fixed and mobile operator in Sweden

January 11, 2018


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Tele2 and Com Hem are to combine their businesses in Sweden, creating an integrated fixed and mobile operator. As part of the agreement, Com Hem shareholders will receive around 26.9% ownership of the enlarged Tele2 Sweden, and a total cash consideration of SKr 6.6 billion ($0.8 billion). Despite Com Hem’s minority ownership of the new business, Com Hem’s existing CEO, Anders Nilsson, will be in charge of the combined entity.

Swedish investment company, Kinnevik, is likely to have driven the transaction, having voted in favour of the merger and committing itself to not selling shares in either party until six months after merger’s completion. Already the largest shareholder in Tele2, with a 30.1% stake, Kinnevik purchased 18.7% of the shares in Com Hem in April 2017.  It is likely to hold 27.3% of the new company, should the merger go ahead.

The completion of the transaction is subject to approval by the shareholders of each party, and the relevant competition authorities. Should this be obtained, the merger is expected to be completed in the second half of 2018.

Our analysis

The move by Tele2 and Com Hem to merge operations creates a clear second player in Sweden in terms of fixed and mobile subscriptions, combining the country’s second largest mobile provider with the second largest fixed broadband provider. A completed merger would consequently put Tele2 and Com Hem in a stronger competitive position against market leader Telia.

Tele2 currently operates as a predominantly mobile operator, since the sale of its residential fixed broadband and cable TV business to Telenor in January 2014. The merger therefore marks a move back into fixed line and TV for Tele2. Conversely, Com Hem is a cable broadband and pay TV provider that does not offer mobile subscriptions. As a result, the overlap between the two companies is small, which should work in the operators’ favour when the merger undergoes the necessary regulatory approval process. Furthermore, Kinnevik has expressed willingness to implement pro-competitive measures if required. This could potentially address any concerns about the role of the investment company in the TV sector, which in addition to its majority share in both parties holds 20% in Swedish media group Modern Times Group, operator of the Viasat pay TV brand. Com Hem is currently the market leader in digital TV, following its acquisition of pay DTT service Boxer in 2016. As of Q3 2017, the operator had 1.1 million digital TV subscribers across cable and DTT platforms.

Mergers between mobile and fixed broadband providers are often motivated by the desire to offer integrated solutions, consisting of fixed broadband and telephony, pay TV and mobile services. Sweden, however, is a market with a relatively high-degree of fixed-mobile substitution and, as a result operators have historically opted not to offer integrated solutions, selling fixed broadband and mobile services separately. Indeed, this was a key factor in Tele2’s decision to sell its fixed broadband business to Telenor in 2014.

Tele2’s agreement with Com Hem therefore at first appears to contradict its disposal of its fixed line business in 2014. However, the number of Com Hem fixed broadband households (736,000) is almost twice the size of the number that Tele2 sold to Telenor (370,000) in 2014. Indeed, broadband has proved to be Com Hem’s key area of organic growth in recent years, with its latest results showing a 7% year-on-year increase in internet subscribers in Q3 2017, continuing a strong upward trend. Com Hem’s merger with Tele2 would result in the latter becoming an integrated operator that can compete with scale in the fixed broadband market. This will also allow Tele2 to be more effective in its cross-selling of mobile services to Com Hem households, which will in turn compensate for Com Hem’s loss of fixed telephony subscribers, which in recent years have fallen from 376,000 in Q4 2011 to 269,000 in Q3 2017. This resulted in Com Hem recently pursuing a TV and broadband-led strategy, to which the integration of Tele2’s mobile business will prove complementary, if it allows for the cross-selling of TV and broadband products to previously untapped customers. For both operators, increasing the number of products available per household and, in turn, reducing the churn rate of Tele2 and Com Hem customers is key to the merger, as both operators have some of the lowest retention rates in Sweden. On a wider scale, the transaction underlines the prevailing trend of integration between cable companies and telcos in Europe.

As of Q3 2017, Com Hem had access to 2.7 million addressable households. Mergers and acquisitions have been crucial in Com Hem’s expansion of its footprint, with the operator claiming its acquisition of Boxer particularly helped boost its coverage from two million to 2.7 million addressable households. 

Geography
Sweden
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