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Telenor and Telia merger to create Nordic champion

01 September 1999

Pending EU approval, Telenor, the dominant provider of telecoms services in Norway, is set to merge with Telia, its Swedish counterpart. The merger, the first in Europe, would create an operator with significant mobile, Internet and media interests. Telenor's CEO Tormod Hermansen talks to Basil Ballhatchet about the main challenges that would face the merged entity.

Telenor, the Norwegian state-owned operator, expects to gain approval from the EU for its merger with Telia, its Swedish counterpart, in October. This would be the first time that two telco incumbents had been merged in Europe. According to the merger agreement, the Swedish state will hold 60% of the capital in the company and Norway 40%. However, both telcos are committed to a parity holding in the company, following an IPO, which would involve the sale of 33.2% to private investors. The new company would be listed in 2000. Tormod Hermansen, the CEO of Telenor, would be appointed new CEO of the merged entity.
Viking Kjellstrom, a telecoms equity analyst at HSBC, talks about the risks and benefits of the merger: "I think the real challenge is to integrate the companies and really bring out the synergies, which are significant. We expect merger synergies of Nkr5 billion ($608 million). When you have a tough merger process, for example, the people on the Swedish and Norwegian mobile side have been negotiating on one side of the table. Now these people are going to sit down and start working together. Of course, that is now a big challenge, as merger negotiations are quite tough. They are handling this issue, by moving all the people to a separate integration office to make sure that all these people really start working together and make business plans, so that once they have EU approval they already have some business plans and strategy to roll out."
The new operator can draw on traditional strengths, such as mobile and Internet services. Kjellstrom notes: "If we break it down, they were quite early into mobile. They have a very nice international mobile footprint. It is very impressive, not as strong as Vodafone/AirTouch, but not far from it. Similarly, they are very advanced in the Internet. Coupled with their investments in international infrastructure, they could be quite a powerful supplier in that area as well. Interestingly enough, they are strong on both the corporate and consumer side. So they could actually explore the IP carrier trend and the sort of portal business side of things, where you have opportunities relating to E-commerce. We also see them as very strong in media, not only cable, but also on the satellite front where they are into broadcasting, satellite, mobile and data communications. I would rank them as number three in Europe on that level. That could provide them with a competitive advantage in Europe."

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Telenor has already perceived the benefits of being an IP carrier. It recently announced a link-up with Cisco Systems to build the world's first national full-service network, based on IP technology.
If approved, Telenor and Telia plan to sell all overlapping assets over the next two years. The new company may also have to dispose of cable interests, as the EC has already expressed its concerns about operators which also have a dominant position in cable TV.
In an exclusive interview, Tormod Hermansen the CEO of Telenor explains how the new operator could make a significant impact in both the Nordic and European telecoms markets.
When do you expect the Telia/Telenor merger to be approved by the European Commission?
By mid-October.
Presumably you have to sell certain assets to ensure this approval?
So which assets will you have to sell?
As is well known, the Commission has raised the issue of cable TV. I think that was to be expected, because you know that the Commission, and in particular Mr. Van Miert, has very strong views about allowing incumbents to remain in the cable TV business as well. So that issue was brought up very late in the first phase of the approval process. But we know that this is on the table now. This is one of the issues that we will have to discuss in depth with our merger partner.
Do you think that a merger of two former incumbents is healthy for European telecoms?
Yes, in particular for telecoms in Europe. This merger is not a defensive step. It is primarily geared at healthy competition in the European market. We are more advanced in key areas, we have lower prices, we have carried out more efficient operations and we will bring to Europe a company that has already proved that it is a leader in most areas. And we already have some important activities in Europe.
It would be a misunderstanding to look at Telenor and Telia as traditional incumbents. Firstly we are very strong in the Internet. We have established a presence in a number of countries in Europe and elsewhere. And we are much more aware of our revenues from data communications, satellite and other new businesses. So we really have something to offer to the European market.
When can we expect to see a stock market listing of the shares in the company to be sold by the Norwegian and Swedish governments?
The new company will probably be listed in the first half of 2000. Our working schedule is based on a listing early in the second quarter.
Why was there a 60/40% split of the shares in the new company?
That was a result of variations in the valuations of our two companies at the exchange rate at that time. Telenor brought 40% of the values in the company, while Telia brought about 60%. These values are approximate, as it is always difficult to assess the worth of different companies prior to their actual listing. This is not an exact science. But these were the figures that we finally agreed upon.
How easy will it be to combine the management teams of Telia and Telenor? Will you have joint CEOs and CFOs?
We will have no joint positions. We are already in the process of recruiting people to various positions in the joint company. There will be one CEO and one CFO. There will only be one man or woman in each position. It is a demanding task to integrate two old companies. These two companies are about 100 years apart. Joking aside, it will still be a demanding task. It is not that Swedish and Norwegian cultures are that different. After all we have much in common in terms of values, norms and traditions. But there are differences in traditions and the manner in which we do things and in the governance of the company. We have to resolve a number of difficult issues. But we perceive these to be challenges, rather than problems. Both companies display a strong willingness to go ahead and are very innovative. This helps, as we have been through virtually the same processes: downsizing, restructuring, changing from purely government agencies into real companies.
Similarly, what role will the Norwegian and Swedish governments play subsequent to the merger, as they will be the majority shareholders? Could this lead to a conflict of interest in these two markets?

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Hermansen: I look on the governments as financial investors. I expect them to be good owners, in the sense that both governments will work to create value for this company. At least in Norway, since we became a limited company, there has been no government intervention in our affairs. So we have built up a strong tradition in distinguishing between our relations with the government as authority and a regulatory agency and our relations as owner. So I do not expect any intervention.
I would like to add that civil servants are not allowed to serve on the boards of state-owned commercial companies in Norway. Sweden has adopted a diametrically opposing tradition, with civil servants on the board of businesses. The Swedish government has appointed one civil servant to be on the board. But this is the part of the government responsible for owner and investor affairs. So I expect this to be a professional, strong and supportive owner.
And you don't think that there will be any problems, related to labour, social security and other legislation?
Basically the legislation in Norway and Sweden is very similar in most relevant areas. In terms of regulation we are governed by the EU directives.
Which assets are you likely to have to sell? Will you have to sell your stake in Telenordia?
Yes. That is one of our overlapping activities. We are prepared to sell Telenor securities in Sweden and all those activities that are overlapping. Of course, Telia is prepared to sell Telia Norway.
How will this affect your operations in the Irish market?
Telenor invested successfully in ESAT Digifone. Telia has a small stake in the incumbent there, Telecom Eireann. We will sell one of those stakes. We have not published yet a list of the most strategic assets.
When do you hope to complete the disposal of assets?
That depends on the outcome of our deliberations with the Commission. But I expect that it will take from 6-18 months.
What will happen to loss-making international operations?
As you know, most greenfield operations are loss-making for one to three years. We do not see them as loss-making, rather as values which are built up. Both Telia and Telenor have a number of activities in this start-up stage. They will create values for the future. I don't see these as a problem. Quite the contrary. That is the way it works in our particular line of business.
How will the merged entity be better able to compete on a global scale? Will you target the European data market?
Definitely. That is the main challenge. We will target this market both as a carrier and as an Internet service provider in various ways. We will also be very aggressive in UMTS, wireless data communications. We have already invested in a fairly large number of companies. And we will definitely be an important player in the European Union.
Why have you decided to form 14 business units? Surely there is a risk that the units will overlap and target the same clients for similar lines of business?
To a certain extent, yes. I think that we formed the 14 business areas from a practical standpoint. We needed to get the process started from the bottom up as well. It turned out to be a convenient starting point. In order to present ourselves to the capital markets, 14 business units are too much. We will certainly combine these units, for presentation purposes, into six or seven business lines. Organizationally you never really finish. We will certainly go through a process to create more comprehensive business areas, both from the government's viewpoint and for presentational purposes. You can in fact look at 14 sections as lines of business, rather than business units. This is one of the issues that we are working on right now.
Will you have to reduce the numbers of employees?
Interestingly, when I took over Telenor in 1991, the operator had about 20,000 employees. Now we have exactly the same number of staff. But there is a complete change in the staff, as we have heavily downsized a number of activities, while expanding new areas of operation. I expect a continuation of this underlying process. In other words, there will be downsizing and upgraded use of staff, both as a result of technology and market development.
We will reduce staff in some areas owing to cost synergies. But at the same time we will see strong growth. So the challenge from the employment perspective is to redirect the staff and upgrade their competencies. This will be a difficult task. It is not that easy to channel engineers into the market. But Telenor and Telia have both been working on such downsizing, the re-allocation and upgrading of competencies for the whole of the 1990s. This will be a continuation. This is not a problem: it is a challenge. Although it is a rather costly challenge.
State-owned operators have been based on traditional models of voice telephony. How are you going to transform the company into one that can take on new entrants that are able to build state-of-the-art networks from scratch?
Well, your questions may be relevant for most European incumbents. But it doesn't apply to Telia and Telenor. We have pioneered developments in satellite, mobile, carrier and Internet activities, even in the directory business. If you take Telenor, we have been competing with Netcom in GSM since 1994. Telenor has been the most successful incumbent in retaining market share. We retain 70% of GSM market share. No other incumbent has managed to be the front-runner. You can see the same situation in ISP. We have 70% of the ISP market, despite a number of competitors. We have been innovative and will continue to be. Therefore, as I said earlier, the main reason for the merger is to join forces and exploit our modern way of doing things and innovative traits, in order to strengthen our activities in Europe. So we will really be an important player in all areas.
Could you tell us about your link-up with Cisco Systems to build the world's first national full-service network based on IP technology?
As you know, Norway is not the easiest place to establish good telecommunications. There are long distances to cover, fjords and mountains. We have managed to get to the forefront technologically and also in pricing. We envisage an IP-based future. We have been working in the direction of multi-purpose networks for some time. We consider Cisco to be probably the most experienced and advanced supplier of network equipment. We are pleased that we have this partnership and will gain experience together with Cisco on how to set up this new type of network We are proud that Cisco decided to work with Telenor on this issue. Obviously Cisco had discussed this network build with other operators. I expect Telenor to become a front-runner in network development and IP-based networks in the future.
When do you think that the network will be complete?
Never. Actually this project will last two-three years in the first stage. Then we will have to evaluate it ourselves and go further. You know, good partnerships never end. Network development never stops.
How will you link this network with Telia's infrastructure?
Telia and Telenor have both invested significantly in modernizing their transport networks, with ATM and similar things. We are very close to completing the SDH installation. And now we are deploying ADSL. The only difference is that Telia has been working closely with Ericsson, while we have used other suppliers, as well as Ericsson. As I am not an engineer, I cannot say too much about this issue. Our engineers will assess how the two networks can over time be developed more along the same basis. I expect that we will exploit the best systems for both companies.
If we can continue on ADSL. Can you tell our readers about the recently launched terrestrial broadband ADSL service? Where are you offering such services? What customers are you trying to attract with such services?
We launched this service in Oslo, Stavanger and Tromso. We will offer ADSL services in most big cities in Norway by the end of 1999. We are targeting small and medium-sized businesses that do not have their own high-speed lines, but need more broadband capacity or higher speed than is offered by ISDN. Let me add that we have the highest penetration of ISDN in the world. So we have been quite innovative.
The customers will basically be the good old companies and institutions that are too small to have their own leased lines, but need high capacity in their telecoms systems. This is the first stage of offering broadband services on the copper wires. We have had interesting experiences and tests in this area in multi-media offerings, even television. We want to be at the forefront. We have been looking at the opportunities to create values, modernizing and building far more capacity in the access networks. This is one of the prime challenges for the coming years.
You mentioned ISDN. I believe that you have about 370,000 users. When do you expect to have one million users?
It is difficult to indicate the exact number of subscribers or users, as one subscription includes at least two lines. We now have installed more than one million ISDN lines: 40% of the fixed network traffic is now ISDN-based. We may well pass the million mark in three or four years' time - in that case not only as ISDN connections but also as ADSL connections, which we will also be offering to our customers. The development of the Internet is very closely linked to ISDN, much more so in Norway than elsewhere.
When do you think that IP voice telephony will become feasible? Will you cannibalize your revenues?
We already offer IP voice telephony, as many other companies do today. We were the second telco, after operators in Finland, to launch commercial offering of this service. We can perceive cannibalization in all services. We are not afraid of cannibalization. We offer what the customer wants and is willing to pay for. We have a number of competing services. GSM for instance surpassed the analogue NMT mobile system long ago. So this is not an issue.
What new services do you plan to offer on the IP network?
Probably there are no limits to fantasies. The future network will probably be a very high-speed network with significant capacity and will be IP-based. You can expect all types of services: interactive, media and E-commerce services. My job is to organize these activities. I am not updated on what new services will be offered.
How will regulatory intervention affect network access and prices?
I expect the EU and the national regulatory agencies to impose stringent regulations, enabling our competitors to use our network. Local loop unbundling is now under discussion at the EU. We have discussions about local loop unbundling as a condition for the merger. We feel that we are very well prepared. White papers on local loop unbundling were submitted to Norway's parliament in spring.
Most importantly, we own the network. We have to develop the network further. Therefore we want to offer network access on commercial terms. There are some technical aspects related to the network facilities. So only one company should own and be responsible for the network. We are very much in favour of open networks. We open this network in Norway and Sweden: we expect that this will have a certain impact on our market share. On the other hand we expect to gain similar access in other countries and exploit other opportunities. We are in favour of local loop unbundling.
Once the merger is approved, will you make strategic acquisitions in the Nordic markets? Will you concentrate in this area, or will you make more investments in mainland and central Europe?
Clearly we will be very interested in making further acquisitions in Europe. We are also looking at Asia. We are large in Russia and Eastern Europe. We also have some activities in Latin America. We expect to have Tele Danmark and Ameritech as an important competitor in most areas. But we still have very good working relations with Tele Danmark. I believe that we will see a process of structural adaptation of the European market. And we will take part. There are number of opportunities.
Telia has investments in Estonia, Latvia and Lithuania. Will you step up your investments in this region? Will you become an integrated service provider in this region? Will Telia's collaboration with Sonera in the Baltics affect this co-operation?
We will certainly co-operate with Sonera, not only in the Baltics, but also in other parts of Europe. We will certainly be in the Baltics for the long term. We aim to develop telecoms there. We will invest whatever is necessary to create an efficient and profitable activity in this whole area.
Was your investment in VimpelCom affected by the devaluation of the rouble in August 1998 and the economic crisis in Russia?
We have been in Russia for nine years, in the north-west and in St Petersburg. We have decided to go further into Russia. We have been in discussions with VimpelCom and other companies there for a long time. Inevitably the economic crisis had an impact on the timing of these investments and the price. VimpelCom is a listed company. We thought that it was the most promising company to participate in from a risk perspective. There are some challenges in working in Russia. For example, the change of government the other day, which is the third or fourth change, since we started working with VimpelCom. Clearly there are political risks, but there are promising long-term market prospects. You could consider our investments so far as positioning. We see a number of opportunities in Russia.
What benefits would you gain from a global player such as British Telecom as a strategic partner? What forms of co-operation would you look to have with BT in the future?
If you take Telenor and Telia together, we will still be a small operator in this game. We have no opportunity to develop a global network, so we need a global network partner. We also need a partner in R&D. We expect our partner to respect our independence as a company. There are a number of ways to co-operate as partners. You should never rule out equity investments. We haven't finalized discussions on this issue yet, but we can see various options.
One option is to work very closely with BT, as Telenor has been doing for some time, as I say not primarily from the point of view of global access, but also based on R&D. Telia has over time come to look upon BT as one of its main competitors. So we have to go through a process of defining our own strategy interest in more detail, before we can really take any strategic decision. But as I see it, we will still be a small company. We will have to work with a number of partnerships. It could also be interesting to have a more general partner. This is something that we will have to work on. BT is a possibility, but there are other options.
Telenor recently won a UMTS licence to test new mobile phone technology. What was the significance of this licence award?
We have UMTS licences for Norway, Sweden and Finland. It is our ambition to be a front-runner in UMTS. Telenor has been involved with other operators and suppliers in the development of a universal standard. It is the most important development in cellular for the next three or four years. We intend to invest at least the same amount in UMTS as we did in GSM. It remains to be seen what impact UMTS will have on the industry's structure. But we will always look at partnerships and co-operation.
How many cellular subscribers do you currently have in Norway? What percentage of the Norwegian market do you currently have?
Telenor had 1,527,000 GSM subscribers and an additional 160,000 subscribers to the analogue mobile systems at the end of the first six months this year. This represents continued strong growth. If we incorporate the estimated number of subscribers with those of our competitor, Norway has a total penetration of over 55%: this is the highest penetration in the world after Finland. In Norway Telenor now has a market share within GSM of close to 70%.
Will you combine with Telia's mobile subsidiary to offer one set of services to both Norway and Sweden?
I am convinced that we will see pan-European and pan-Nordic services in a very short time. And we will certainly be eager to be at the centre of such operators. I can't say when that will happen, as a number of regulations have to be adapted.
A number of operators have referred to the need to focus on core competencies. Telenor has, however, invested significantly in broadcast media, acquiring Norkring. You will be responsible for 90% of terrestrial television and radio in Norway. Is there a risk that you will lose your focus, as you become a content provider?
We will certainly not become a content provider. We are a content distributor. We will not engage in content provision. We have a very close relationship with Canal Plus on distribution rights. We need to fill the capacity in our satellites with interesting TV channels and programmes. Now what is core competency? I started in this company in 1991. Some people at Telenor talked to me about our core competence. It was fixed line telephony. Mobile wasn't part of the core. When IP and the Internet came up, people told us that we should keep to our core competencies. The notion of core competence is continuously changing, and we have to change with it.
Telenor announced recently that it was offering the same charge for both national and local calls. Will this substantially erode margins from national calls? Why did you decide on such a move?
First of all we have had to institute a long process of rebalancing our prices. We saw very early that we had to distinguish in the future between local and long-distance calls with low cost bases. We increased our subscription prices. From a competitive angle we thought that we would have the strongest edge and best balance, if we had just one call price. As we couldn't perceive the difference in the cost base in the long run, this step would not add much to our cost base, compared to the impact of lost market share owing to price increases. So we considered the issue from a competitive and regulatory standpoint. We feel that while core prices should fall further, we need to keep a fairly high subscription price. This change has been very well received by our customers and the regulatory authorities. This move makes it a little more difficult for our competitors. Hopefully this should have a positive impact on long-distance services. The prices in Norway are very low, so the margins are also very low. To make money, you need to achieve a certain volume.
How do you view the potential for E-commerce?
E-commerce has developed very rapidly in the Nordic countries, but not as rapidly as you would expect in the future. In Sweden E-commerce has focused on business-to-business, while in Norway E-commerce has been more business to customer. Telia and Telenor are very actively involved in these developments: Telenor has focused on the Net market, while Telia has concentrated on the business-to-business market.
Do you believe that Telia/Telenor will be able to set up a cable TV network? At the same time, is there a risk that the EU will try to separate Telia's cable and telecoms assets? Is there a risk that you may invest in upgrading the cable network and then end up having to dispose of this network?
You have struck the core of our discussions with the European Commission. Let me come back to an earlier question about core competencies. We have defined TV distribution and broadcasting as a core competence. This provides an interesting opportunity to have a technological platform for various satellite and broadband services. From the outset, it was not our intention to buy Norkring. The broadcaster took up the issue with the government. We were supporting a government decision. Telenor has owned from the outset most of the television network. We felt that we would run things more efficiently, if we controlled the whole network. You can clearly derive benefits from economies of scale.
We still think that TV distribution and broadcasting is a very interesting area. We own three satellites in Europe and we rent a lot of capacity in other satellites. We distribute from Ukraine, Russia and most East European countries. We still want to be an important player in Scandinavia. The relation between satellite TV and cable TV distribution is not as simple as it used to be. There are other new platforms.
If we are forced to divest ourselves of cable, we will build other platforms based on our fixed line and terrestrial broadcasting. We are not afraid of losing focus, as this is a separate part of our long-term strategies. Satellite broadcasting is also necessary as a base load for satellite systems. You have to fill the capacity with television.
Do you think that the EU will try to make you divest all cable TV interests?
If you put it that way, I expect that they will. It is well known that they will ask us to divest and may even force us to sell. So we have to develop our own solution, in order to remain in TV distribution, through other platforms, such as satellite.
How are you implementing your strategy to be a leading IT services provider?
There are two interesting lines of development. Firstly large customers want to buy a complete package of communications and IT services from one source. We have set up companies in Telia and Telenor that receive outsourcing contracts. Outsourcing contracts are important, in the sense that we have a fairly efficient operation in running and operating IT systems. The other aspect is to establish and service it with IT systems. You could look at this as a core competence. But you don't need to do that. This is an area where we engage in close co-operation with other companies.
For example Telenor has put most of its operational activities in IT into a listed company. We are the majority owner. The future for this service depends on our ability to retain our competitive edge. This is very much manual work. In Telenor we have organized this into a separate company. Importantly the revenues into this company are not based on any traffic income. They are paid for their ability to sell in the market. And we have been, I would say, very successful. We will probably do the same in a merged company. This IT service could develop in a way that makes it convenient and practical to take the other owners in the company and list it on its own. Personally I very much believe in running these sorts of companies at an arms' length distance to communications-based companies.
Why? Do you think that there is a risk that it could damage your market branding?
No, not to the brand. I think that this creates the strongest possible incentives on the IT and installation contracts. They need to have a fairly large number of services and activities. Those activities are to a certain extent different to those of a communications company. We want to be the majority owner, but not the sole owner. It should be kept, in order to achieve an efficient market between the suppliers and buyers of these services, which will to a certain extent be internal companies.
What are your hopes and ambitions for the company over the next two-three years?
My ambition is to establish the new company in an efficient way, achieve a stock listing, see the share price at a level that the equity holders like and make sure that Telenor becomes established in a strong way in Europe and also Asia. We expect the total value of the company to at least double within four to five years. That is my ambition. I also want this to be a real transnational company.
What trends do you see emerging in telecoms in that time frame?
The strong underlying trend concerns rapid change from more traditional switching to IP. That is the real main trend. We are already well established. I believe that you will see profound restructuring in Europe and that there will be some consolidation. I guess that there will be fewer larger companies at the top end and that there will be a large number of small specialized companies in the low end of the market.
So you have to find your place, either among the large or small ones. This is a challenge, as we can never be one of the large companies. We could be a very efficient in-between operator in some areas. We expect mobile to be one area where we could have the necessary scale. But that would require involvement in structural transactions. We also expect our satellite activities to serve as the basis for expanding into other areas. So the future is IP, mobile, data and a number of niche players and a much more efficient market. Even in two years the markets in Europe will be borderless.
Is there anything you would like to add?
I would like to stress that this industry is great fun. We are privileged to be able to take part in these developments. It is fascinating from an organizational and commercial viewpoint, which is my main interest. If someone had asked me 15 years ago if telecoms could be a fascinating business, I would have doubted that. When I said in 1990 that telecoms would be an interesting industry, only a few people agreed with me.
I entered this field by chance: the government asked me to take over telecoms operations. I was permanent secretary in the ministry of finance. I had to choose between a position at the central bank of Norway and CEO of Telenor. And I chose telecoms. I had the feeling that a lot of things would happen, but I didn't foresee the extent of change in this sector.
I believe that the next 10 years in telecoms will be much more challenging than the 10 previous years. This industry is changing the whole community. It is changing the local, national and global community for the better: when people can communicate, people get to know each other and get together. This is a very good business. It is very competitive. You have to keep on biting the table. If you look at Scandinavia and compare developments with the situation a year and a half ago, only one of the five CEOs is still in place. So it is a tough game. But it is great fun.
I think that it is difficult to find any other sector which provides such challenges. I am not a technician, I am not an engineer. I am not really concerned about the type of services. I want to make young people keep the speed, work efficiently and realize their ambitions. I think that I become more fascinated with this sector every year.