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Morningstar | Telenor Agrees to Enter Finnish Telecom Market With Acquisition of DNA; Shares Fairly Valued

Telenor announced April 9 that it agreed to acquire a 54% position in DNA, the third-largest wireless phone company in Finland, from DNA’s two largest shareholders. Once that deal is completed, Telenor will make a general offer for all outstanding shares at EUR 20.90 per share. Telenor will initially pay EUR 1.5 billion for the 54% stake, which values DNA at about 11.1 times enterprise value/EBITDA, at the high end of phone company valuations. However, DNA is a fully converged operator, so besides having 28% wireless market share, it also has 28% broadband and 35% cable-TV market share, making it the second-largest broadband provider and largest cable-TV provider in Finland. There are three converged operators in Finland, which has led to a relatively stable market, though DNA has gained some market share over the past two years, which Telenor expects will continue. Telenor expects some synergies that will slightly reduce the price of the deal. While we think the deal is expensive, we don’t think it is large enough to change our NOK 164 fair value estimate. The transaction doesn't change our narrow moat rating either, and we think the shares are fairly valued.

Telenor has one of the lowest debt/EBITDA ratios in our European communications coverage after selling its operations in India and Central Europe. Thus, the firm can easily fund the deal from debt issuance, which will take its debt/EBITDA level to about 1.3 times. We expect Telenor will continue to buy back shares as well, despite the higher debt level.