TeliaSonera says size still a problem at Spanish unit Yoigo

By Harro Ten Wolde and Leila Abboud

BARCELONA, Feb 25 (Reuters) - Swedish group TeliaSonera (Dusseldorf: TLS.DU - news) has to take action on Yoigo, its Spanish mobile business, as it is currently too small to compete effectively, Chief Executive Johan Dennelind said on Tuesday.

"Being number four with a 7 percent market share in a converged market, where you really don't have scale, of course is not great for long-term profitability or sustainability," he told Reuters at the Mobile World Congress industry fair in Barcelona.

"We need to find a way to move Yoigo to a sustainable position."

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

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 (Other OTC: FNCTF - news) , add bulk with a tie-up with domestic broadband group Jazztel (Madrid: JAZ.MC - news) , or merge it with Orange's Spanish business, the second-biggest operator behind Telefonica (Madrid: TEF.MC - news) .

Dennelind declined to comment on specific options but acknowledged that something had to be done as Yoigo faced "a challenging future with its current position."

"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.

"TeliaSonera has a good financial position, which gives us some flexibility if and when opportunities arise."

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.

Instead analysts at Berenberg bank estimate that a purchase of Jazztel (Other OTC: JAZTF - news) 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 were down 0.3 percent at 50 crowns by 1613 GMT on Tuesday, valuing the company at around $33.3 billion. The shares are down 7 percent so far this year compared with a 2.6 percent fall in the Stoxx Europe 600 telecoms sector index.