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Wednesday, October 03, 2007

Telekom Austria Bags Another Risky Bargain

Telekom Austria has completed the buy-in of the number #2 Belarusian mobile operator, Velcom. They have paid €730m for 70% with an option for the other 30% priced at €320m. There is a performance related deferred consideration which looks as if could be quite substantial based upon a multiple of 2010 earnings rather than the multiple of estimated 2008 earnings that the deal was based upon.

So for around €1bn, Telekom Austria has bought 100% of a mobile operator in an underpenetrated (77%) market with a market share of 42%, revenues of €262.6m and an EBITDA margin of €158.8m in 2006 for a price which is 6.6x 2006 Earnings. Of course, the capex/sales ratio is quite high at 29%, but this is to be expected in a fast growing market.

The real downside is that the operation is in Belarus. There is no telecoms regulatory framework and the state owns a controlling stake in the other 3 licensed mobile operators. The Russian mobile operator, MTS of Russia has a 49% stake in the largest operator with 54% of the market by customers.

Velcom has been up for sale for quite a while and I fully expected Vimpelcom to end up being the owners. However, all become clear when it was revealed that Martin Schlaff had an interest in Velcom. Martin Schlaff had been the previous owner of the Bularian operator which Telekom Austria took over. He had also tried to help Telekom Austria acquire an operator in Serbia until Telenor came along and ruined the party.

tel-aus footprint

I am wondering where Telekom Austria will go next. Obviously Bosnia is a big hole in their map and I would expect something to happen there in 2008. Another possibility is in Lithuania and Latvia where the ex-TDC Bite operations are now owned by private equity and presumably will need refinancing in the medium term. Other than that, Telekom Austria will be running the risk of treading on the toes of its much larger partner footprint, Vodafone.