IT and telecommunications company Teo has purchased 100 percent of the shares of the Lithuanian mobile service provider Omnitel from its current shareholder TeliaSonera. The move has provoked a lot of discussion in the Lithuania public sphere and that shouldn’t surprise anyone as the purchase is one of the biggest in Lithuania’s business history. Both companies are owned by Swedish Company TeliaSonera.
© DELFI / Šarūnas Mažeika

Teo will acquire Omnitel for 220 million euros on a cash and debt free basis and the combination is estimated to generate annual synergies of around 10 million euros when implemented. Audit company KPMG gave a report to the Teo board, saying that the stock price was reasonable. Based on Omnitel's full-year 2014 results, the purchase price corresponds to an EV/EBITDA multiple of 7.8x or approximately 5.7x, taking the estimated synergies into consideration.

The transaction should not come as a surprise, as both companies have belonged to the same owner and offered overlapping services. According to Kęstutis Šliužas, Teo is going to offer unique service portfolio, which will consist of existing and new integrated broadband and mobile communications, Internet, television and IT services. Another motivation for the move is Teo's plans to attract external funding after the Omnitel shares acquisition. The result could be even bigger development of the company. Another motivation was to optimize the two companies’ management costs, as both already belonged to the same owner.

“The main goal is probably to look for opportunities to reduce costs. The company itself declares expected synergies of 10 million euro annually. So it is possible to predict that some staff will be fired. But that only concerns employees whose functions overlap in the two companies. After the implementation of this transaction, it is possible that the management and certain other functions can be run more efficiently,” finance expert Vytautas Plunksnis told the news portal 15min.lt. He predicts that Teo and Omnitel might be merged into one company in the future.

The competition in Lithuania’s mobile operator market is very high. The main competitors of Omnitel are Bite and Tele2. Service users have been able to benefit from this competition, as prices have fallen significantly in the past year, even though all the three market leaders have seen their revenues contract over recent years.

Competition Council should keep an eye on the newest Teo purchase
© DELFI / Mindaugas Ažušilis

Current CEO of Teo, Kęstutis Šliužas, said that in the near future Omnitel and Teo will continue to use its current brand names. Teo is already a dominant internet provider in Lithuania, and after the acquisition of Omnitel, its market share will increase up to 50 percent. Omnitel mobile service client base consists of 584,000 private users, 372,000 business customers and 374,000 more customers using its pre-paid service.

Kestutis Šliužas says that the company will act as one operator in the future, providing voice and data transmission, TV and also IT services. New services can sharpen competition, what will likely push prices down, although, he adds, it is still too early to talk about that.

After the transaction, TEO and Omnitel will begin to join forces and propose new joint services of broadband and mobile telephony, Internet, television and IT, something that will be felt by their customers.

“Consumers no longer make a distinction between fixed and mobile services and the demand for converged offerings are steadily increasing. The combination of Teo and Omnitel will create a leading, fully converged telecom operator and strengthen the market position through clear synergies and enhance customer proposition,” said Robert Andersson, Chairman of the Board of Teo.

The new business will be run by a single management team led by Kęstutis Šliužas, current CEO of Teo. Both Šliužas and Dan Strömberg, CEO of Omnitel, will continue in their current roles until the end of 2015.

Kęstutis Šliužas
Kęstutis Šliužas
© DELFI / Kiril Čachovskij

Naturally, when management structures change, one should expect corresponding changes in staff functions, possibly leading to some redundancies. However, the companies have yet to announce what changes are in the pipeline for their respective staffs. Teo currently employs 1,857 people and Omnitel has some 600 employees.

The Competition Council will monitor the move

In July 2002, the Competition Council of Lithuania approved the Swedish Telia’s purchase of the Finnish Sonera. Through their jointly controlled entities Amber Teleholding and Amber Mobile Teleholding, the two controlled 60 percent of Lithuanian Telecom (now Teo) shares and 55 percent of Omnitel shares, respectively.

However, the lawyer Lina Darulienė told the news portal vz.lt that if the companies merged their management, the permission from the Competition Council would be necessary again. The Competition Council will therefore be monitoring for any attempts to circumvent the requirement.

The Competition Council greenlit the transaction on the condition that Telia could not change or strengthen its control of Omnitel. Moreover, these terms preclude any moves to merge Omnitel with Lithuanian Telecom or any other Telia-owned company without notifying and securing the approval of the Competition Council.

It should be noted that reorganization and purchase of shares is not the same. It is possible to purchase shares but not to make any reorganization in a company’s management, e.g., reorganization can be carried out mergers and divisions of ways. According to Kęstutis Šliužas, Teo acquisition of shares from its current owners is a formal procedure for developing a new generation of IT and telecommunications business.

After the transaction, Teo shareholder structure remains unchanged. In other words, TeliaSonera will continue to own 88.15 percent of the company’s shares while small shareholders will account for 11.85 percent of Teo ownership and, indirectly, Omnitel.

Teo earned 38.09 million euro net profit in 2014. In the second quarter of this year, Omnitel received 33.17 million euro in revenue. It is 6.7 percent more than in April-June last year.

TeliaSonera offers telecommunication services in Lithuania. Mobile services are marketed by the wholly-owned company Omnitel, and landline services are marketed by TEO.

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