Telefónica’s Purchase of Ćeský Continues its Quest for New Market Entry Opportunities
In early April, the Czech government sold its 51% stake in Ćeský Telecom to Telefónica of Spain for US$3.5bn (CZK 82.6bn), marking the Spanish giant’s first foray into Central Europe. Pyramid Research anticipates that this will be the first of several transactions in the region for Telefónica. Given slowing growth in its home market and in Latin America, Telefónica will become increasingly active in Central and Eastern Europe as well as Northern Africa. Upcoming privatizations of interest to the Spanish giant include that of Slovenia’s incumbent operator Telekom Slovenije and Latvia’s fixed telco Lattelekom.
Telefonica’s move surprised many, considering its previous lack of interest in expanding to other European countries and its focus on strengthening its presence in Latin America. However, the operator’s recent acquisition is in line with the Group’s strategy of growth. Telefónica hopes to have 165m subscribers worldwide by 2008, almost 20% more than the it current subscribers. Acquisitions of assets like Ćeský Telecom are solid steps on the road towards reaching this goal. After all, Eastern Europe will be one the fastest growing regions in terms of subscribers and revenues throughout the rest of the forecast period.
Telefónica will continue to look for opportunities in Central and Eastern Europe as well as in Northern Africa. This does not mean that the operator is cutting investments in Latin America, where it is the largest telecommunications service provider. Pyramid Research expects that the Telefónica Group will concentrate on the mobile industry and on broadband rather than basic telephony, a market that is stagnant or beginning to stagnate in most markets where the operator is present.
Telefónica’s investment in the Czech Republic (CR) is a safe bet. To begin with, together with Hungarian Matáv and Polish TP SA the Czech incumbent is one of the three largest Central European operators. In addition, Ćeský Telecom is a well managed, very profitable, and highly efficient company. More importantly, and one of the factors that convinced Telefónica to enter this new market, is the enormous potential for broadband growth it offers. As of YE2004, there were only 152K broadband subscribers in the Czech Republic, representing a broadband penetration of less than 2%, a level much lower than it should be considering the country’s macroeconomic profile. Between 2004 and 2009, Pyramid estimates that broadband subscribers will grow at a CAGR of 56% while revenues will grow at a CAGR of 46%.
The Ćeský Telecom deal is beneficial for all involved parties. Telefónica, this acquisition opens the door for entering a stable market with an enormous growth potential. For, Ćeský a new owner will bring about investments in new service and application development, and infrastructure development and enhancement. These investments will allow it to retain its dominant role in the Czech telecoms market and enjoy further growth. And, for the Czech government, the deal means higher than expected revenues and the knowledge that the incumbent is in good hands.
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