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Nine Reasons Why France Telecom/TeliaSonera Makes Sense

By David Molony, principal analyst at Ovum

Financial markets and the financial press have had six weeks to figure out the possible logic of France Telecom’s move on TeliaSonera. But they don’t seem to have used that time wisely—this week’s announcement of a formal offer by France Telecom produced more knee-jerk reactions in the markets and on the front pages.

“Leaving aside the financial T&Cs of a possible merger for a minute, here’s why the deal makes sense—if it does! There may be reasons the deal does not make sense, but that misses the point about dealmaking.”

“It’s easy to dismiss the deal as just another example of a big player joining the consolidation rush. Telcos are filling the vacuum left by private equity investors, and it may look like an unseemly sales crowd, with Vodafone/Verizon Wireless, Telecom Italia and Reliance et al making various tie-ups.”

“But big companies have to be seen to have global business ambitions, as markets are always quick to remind them.”

“It feels like the Orange mobile acquisition has run out of steam on the global scale. France Telecom gained huge credibility when it made that audacious merger in 2000, and then rebranded its own operations under the new colours. Now that’s all done, the market’s imagination has been captured elsewhere, and France Telecom needs a new momentum-driver.”

  • Domestic competition is getting tougher. A merged NeufCegetel/SFR has the enterprise market in France in its sights. If the French government fails to get that fourth 3G licence away, expect the regulator to push for better terms for MVNOs.
  • Regional competition is tough too. Verizon Business had its most successful year in Europe in 2007- in Nordics it beat out TeliaSonera, BT Global Services and Orange Business Services to major contracts like financial exchange operator OMX (a deal we estimate is worth at least $100 million) and booking record business in the region for its managed services.
  • Global competition - guess what? It’s tough. Going head-to-head with global competitors in each other’s home markets has not been a happy experience for anyone. BT bulking is up in France, having failed once already. Orange UK has had to settle for a back seat behind France Telecom’s operations in Poland and Spain.
  • Emerging market operators like Tata Communications and Reliance are setting up shop in Europe, with operations like Cipris and Vanco.
  • Finally, and perhaps most contentiously - the great pillar of France Telecom’s global strategy, FMC, hasn’t been the global winner it was set up to be seven years ago.

So what were the positive reasons for the deal again? “That’s five negative reasons for the deal. What are the positives?”

“First, the immediate advantages. France Telecom/TeliaSonera don’t overlap much geographically. And they aren’t head-to-head competitors in any services or sectors that we know- except maybe carrier wholesale and IP transit; but the operators tend to work in their own regions there.”

“Where they do overlap, in emerging markets, there could be mutual benefits e.g TeliaSonera has network into Russia, where Orange has enterprise customers and new licences for national and long distance licences. TeliaSonera has troublesome mobile network in eastern Europe (Ukraine) where Orange has been more successful (Slovakia) but on a smaller scale. Orange could bring brand and management influence to turn around the TeliaSonera fortunes in overseas mobile.”

Forward-looking strategic reasons

“The proposed merger is most interesting in terms of what it takes to play in the telecoms sector, regardless of whether the TeliaSonera deal goes ahead or not - it is one part of the overall strategy for growth that France Telecom has to pursue.”

Telco DNA more and more has to extend to other areas of influence:

  • Supply chain/verticals - Playing in global managed services in enterprise means having a stake in understanding global business supply chains. You need to understand your customers’ customers. It’s no coincidence CEO Didier Lombard been spending a lot of time talking to other huge French multinationals outside the telco field. A global telco needs to have a roadmap into secure SCM services, based on an extended applications infrastructure. A TeliaSonera that provides services to Swedish automotive and banking companies brings an extra dimension to the Orange Business Services vertical offerings.
  • Ecommerce/ecosystems - other operators are recognising ebusiness opportunities. For examples, see Verizon Business’s acquisition of ecommerce integrator GXS, or AT&T’s relaunch of Sterling Commerce. TeliaSonera is not a Google, but it was always ahead of the curve on hosted IPT, enterprise mobility, SIP and other next-gen building blocks. It’s less clear how much of that has translated into money-making ebusiness products and services, but there’s no doubt TeliaSonera is an innovator.
  • Regional managed services - Here’s a potential big prize. TeliaSonera has made a couple of attempts to break out its local IT and managed telecoms as combined ICT services in the Nordic region (Integrated Enterprise Services) but had second thoughts (see. Orange Business Services could provide the strength in depth it needs to rival IBM and TietoEnator in region. IES was based on the idea of using network services to drive IT engagements. Tier 1 telcos that have fought and lost that battle previously, now understand that is not necessarily the best way to look at it - in fact the telco needs professional services (PS) and/or systems integration (SI) professionals to smooth the way for network-based ICT services. Orange Business Services could bring that leadership to the Nordics.
  • SME services - Less obvious, but TS has innovated in bundled services for SMEs and could be a good partner for le forfait informatique (IT Plan) services into Nordic and even CEE markets, looking further out. Orange Business Service already serves 3,750 companies in 166 countries, and (unlike BT Global Services or Verizon Business) it serves SMEs as well as MNCs

“There is genuine concern in Sweden that the deal should be good for TeliaSonera too, and that France Telecom should explain why it is. Stockholm-based telecoms newsletter Telekom Online, which has good insights into the issues for Sweden’s telecoms users and investors, says the possible sale of TS is politically very sensitive in Sweden, where many citizens invested heavily in TS stock at 85 kroner, when the first tranche of shares was offered to the public in June 2000. The shares are now trading at about SEK 56-58. France Telecom is offering a premium, but at SEK 63 that still leaves many voters out of pocket.”

“France Telecom will need to tread carefully in the regulatory offices too-it launched its formal offer the same day the Swedish Parliament voted new powers to the PTS to impose functional separation of TeliaSonera’s access network if necessary. It might even need to dismantle some of its operations e.g in Denmark where TeliaSonera has recently been in dispute with incumbent TDC. The European Commission might feel that market would not benefit from a heavyweight putting more pressure on the local player.” /PR

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