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TEF O2 wins tender for third Slovak mobile license

TEF O2 wins tender for third Slovak mobile license

3.8.2006 9:39
Autor: KBC/Patria

The Slovak Telecommunications Office announced yesterday that Telefonica O2 has won the tender for the third mobile license in the country. TEF O2 offered 150m Slovak crowns (some US$4.6m), versus the minimum bid set for 100m Slovak crowns (US$ 3.35m). Earlier in the day, the consortium led by Ceske Radiokomunikace reported they were bidding 400m Slovak crowns. However, the Telecoms Office gave price offered only a 5% weighting in the selection. We have always maintained the view that TEF O2 would likely win given its track record, dominant position in neighbouring Czech Republic, and global brand.

Our view:
Whilst we expected TEF O2 to win, we view the move negatively. Although the price for the license was relatively low, initial capex estimates for the network build-out could reach EUR 1bn over 3-4 years, which exceeds TFE O2's profits over that time period. Although TEF O2 said that they intend to keep the network "asset-light", we believe that the license comes with minimum capex requirements that will likely eat into the company's cash pile, widely expected to be for dividend distribution. Therefore, we believe the Slovak roll-out greatly reduces the possibility of higher dividends in 2007 as we do not believe they will be willing to lever up the balance sheet to cover capex and increase in dividends. Additionally, note that Slovakia has 85% mobile penetration, with 2 existing global brands (Orange and T-Mob), which means growth prospects are low. In our view, economic viability for mobile is less attractive past the 70% penetration level. An aggressive push for market share would require capex and opex spending, despite low visibility on returns. We maintain our Hold recommendation and CZK 507 fair value.


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