UPDATE 1-TeliaSonera says size still a problem at Spanish unit Yoigo

Tue Feb 25, 2014 2:24pm EST

* Spain's fourth-biggest mobile operator too small to compete

* Yoigo is key part of new TeliaSonera CEO's strategic review

* CEO says to look at opportunities as they come up

By Harro Ten Wolde and Leila Abboud

BARCELONA, Feb 25 (Reuters) - Swedish group TeliaSonera has to take action on its Spanish mobile business Yoigo, which could include making acquisitions, as it is currently too small to compete effectively, its chief executive said on Tuesday.

"With a 7 percent market share in a converged market, where you really don't have scale, of course is not a great position for long-term profitability or sustainability," Johan Dennelind said on the sidelines of the Mobile World Congress trade fair in Barcelona.

"Now the focus is to create value and make Yoigo future proof. And there is a lot of work to realise that," he said.

Finding a solution for Spain's smallest mobile operator, in which the Swedish firm has a 76.6 percent stake, is a key part of the strategic review which began when Dennelind took the helm in September.

TeliaSonera is open to all options including making acquisitions or selling the business as whole, Dennelind said.

"Making Yoigo future-proof requires us to be active because it needs both investments organically but also for us to look at opportunities as they come up," he said.

Yoigo has struggled to recruit customers and turn a profit since its creation in 2006. Last year it added 136,000 customers on a net basis, compared to 394,000 in 2012, while mobile service revenue actually shrunk, according to Berenberg.

Analysts say Dennelind now has several options: sell Yoigo outright to a rival like Vodafone or Orange, add bulk with a tie-up with domestic broadband group Jazztel , or merge it with Orange's Spanish business, the second-biggest operator behind Telefonica.

Dennelind declined to comment on what specific options his company might be considering, saying only that, "We can't stop where we stand today."

And after four years of economic recession, Spain's telecoms sector looks set for a period of consolidation, industry executives and bankers predict.

Most immediately cable operator Ono is preparing for a possible share market listing and Vodafone has also expressed an interest in buying it as part of a move towards bringing fixed and mobile telecoms services together.

The rising popularity in Spain of deeply discounted all-inclusive bundles of fixed and mobile phone, television and broadband services, which market leader Telefonica began pushing in late 2012, has hit Yoigo hard.

In 2013 TeliaSonera's Spanish business had a profit margin at the level of earnings before interest, tax, depreciation and amortisation (EBITDA) of 7.3 percent on net sales of 9.5 billion crowns, and had a book value of 2.549 billion Swedish crowns ($392 million) as at the end of 2012.

TeliaSonera sought to sell Yoigo in 2012 but bids from Vodafone and Orange were dismissed as too low.

But Dennelind says the company now has more options. "TeliaSonera has a good financial position, which gives us some flexibility if and when opportunities arise," he said.

Analysts at Berenberg bank estimate that a purchase of Jazztel could cost TeliaSonera about 3.1 billion euros, taking its net debt to EBITDA ratio to 2.3 times.

"TeliaSonera can afford this deal," the analysts said.

Dennelind declined to say how much time management has in Spain to do something with Yoigo but expressed a sense of urgency. "I am very impatient on building a future proof business. That is my nature."

Shares in TeliaSonera closed down 0.2 percent at 50.15 crowns by 1613 GMT on Tuesday, valuing the company at around $33.3 billion. The shares are down 6 percent so far this year compared with a 3 percent fall in the Stoxx Europe 600 telecoms sector index.

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