Pair trade telia sonera vs. tele2

Pair Trade: Long TeliaSonera - Short Tele2

Tuesday, October 23rd 2012

Investment Case

Technical Comment

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Companies Description

Analysts Recommendations:

Source: Bloomberg

Market Price Data

TeliaSonera

Last Price (SEK) 44.480

YTD Change -4.90%

Mkt Cap (SEK bn) 192.602

Tele2

Last Price (SEK) 113.90

YTD Change -10.30%

Mkt Cap (SEK bn) 50.794

Source: Bloomberg

Market Multiples

P/E EPS DY Net Debt/

2013 CAGR 2013 EBITDA

Est. Est. Est. Est. 2012

TeliaSonera 10.38 0.61% 7.76% 1.59

Tele2 9.79 7.70% 10.64% 1.35

Source: Bloomberg

Next Report Date & Events

TeliaSonera YE Report: January 31th, 2013

Tele2 Cap. Mark. Day: Dec. 12th, 2012

Interim Rep.: February 5th, 2013

Source: Companies' web site

TeliaSonera (TLSN SS) faces a number of potential cash inflows that

could support the shares:

TeliaSonera sold its 8% indirect stake in Megafon in Q2, but only

received 20% of the total proceeds ($1.45bn). The rest should

be paid in four annual installments. Megafon is due to list via an

IPO;

In Spain, according to the press, TeliaSonera hired banks to

advise it on the sale of its Spanish business Yoigo;

In Kazakhstan, TeliaSonera could also be planning to IPO a stake

in its local company.

TeliaSonera intends to deleverage its Balance Sheet (although the

company’s net debt/EBITDA is not especially high by the standards of EU

telcos). But, will the company also return some cash through a special

dividend or a buyback? Key risk is market focus to shift back to the

fundamental story. Q3 2012 highlighted a deteriorating trend in Telia´s

Nordic assets.

Tele2 (TEL2B SS) has a solid business model. However, there are some

operational headwinds that could continue to hold back the stock:

No near-term award of spectrum in Russia. Will Tele2 fall

behind on mobile data, in Russia?

The company has not yet decided whether to bid for a 4th

license and roll out a mobile network in the Netherlands;

Investments in Russian and Kazakhstan could penalize Tele2’s

FCF yield.

The TeliaSonera / Tele2 ratio has a current value of 0.3905. We’ll define

as our price target 0.4033 (+3.27%). 0.3831 will be our stop-loss level

(-1.90%).