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Morningstar | Tele2 Is Even Further Leveraged To Sweden with the Sale of its Kazakh Operations

Tele2 has transitioned from a mobile virtual network operator, or MVNO, to a full wireless operator. With its acquisition of Com Hem, the largest cable TV operator in Sweden, it is moving into the converged world of bundles of fixed-line and wireless telephony along with broadband and pay TV that we have long been a proponent of in Europe. We like these shifts in strategy. We are also pleased the firm successfully merged its Dutch operation with Deutsch Telekom’s Dutch operation, which leaves Tele2 owning 25% of the combined business.The firm's home base is Sweden, where it is the number-two operator after incumbent Telia. With the acquisition of Com Hem and the divestitures of its Dutch and Kazakh operations, we estimate Sweden will account for about 77% of Tele2's 2019 revenue. The firm has successfully strengthened its strategic position in Sweden, first with the acquisition of TDC's operations in the country at the end of 2016, which significantly improved its enterprise business, and now with the acquisition of Com Hem that makes it a fully converged operator in Sweden. However, the Com Hem acquisition significantly increased Tele2’s debt level, but we expect the firm’s steady free cash flow will be sufficient to handle the additional debt, continue to increase its dividend, and to invest further in its operations.We have been pleased with Tele2's success in the Baltics, where revenue has grown in the mid- to high single digits the past three years, and we expect another strong year in 2019. However, over the longer term, we expect that generating revenue growth will become more difficult. Subscriber growth is already slowing, and we don’t anticipate data growth can continue to drive average revenue per user, or ARPU, to the same extent it has recently.