Telenor: The mobile champ on mute

Although you may not know Telenor, the 153-year-old telephone company has a footprint that extends from its native Norway to hot-growth markets including Ukraine, Serbia, Thailand, Bangladesh, and Pakistan. Through smart acquisitions and pioneering moves into new mobile services it now has a market capitalization of $31 billion and counts 129 million subscribers. That makes Telenor (TELNY) the seventh-largest mobile operator in the world, behind China Mobile (CHL) and Vodafone (VOD) but ahead of France Telecom's Orange (FTE) and all of the U.S. carriers.

'It is not the heroes of the industry"”the T-Mobiles and the Oranges"”that will deliver the next billion subscribers,' says John Strand, a mobile analyst and founder of Copenhagen researcher Strand Consult. 'Telenor is well positioned because it entered high-growth emerging market countries 10 years ahead of companies like Vodafone.'

Investors fear the best is over

Yet despite its success, Telenor has run into a bearish patch with investors. Shares in the European telecom sector are down as a whole by 21% since the beginning of the year, but surprisingly, Telenor, the darling of the industry, is down even more"”by 26% this year.

To a certain extent, the company, like other European telcos, is getting whacked by jitters over the global economy"”though analysts say they still believe the telecom sector will be more resilient than others in a downturn. But investors have soured more on Telenor because they worry its rapid growth story is over.

There's some merit to the concern. Telenor's revenue growth fell from 12% in 2007 to 6% in fiscal 2008, due in part to a 10% decline in Norwegian mobile revenues (attributable to stiff price competition, not slackening demand) and a 3% drop in wireline revenues there. What's more, investors are worried that some emerging markets, such as Russia, are now approaching saturation and will no longer provide double-digit growth to offset that decline. In other markets, such as Pakistan and Bangladesh, a combination of political instability and increased competition could slow revenue growth.

That's not the only thing spooking investors. Telenor's stock has been hit by a messy, long-running dispute with Altimo, the telecommunication investment arm of Russian private equity group Alfa Bank. The two companies are fighting over a complex web of holdings in Ukraine, and on Mar. 25, an Altimo subsidiary filed a $1 billion lawsuit against Telenor seeking damages. Telenor rejects the claim.

Analysts see room for more growth

Despite these assorted risks, many analysts think Telenor's shares are undervalued. Brokerage Bear Stearns (BSC) has a price target on the stock some 44% higher than its current trading level. 'Telenor is still growing faster than the market,' says Maurice Patrick, a Bear Sterns analyst in London who follows European telecoms. 'It is a story of two companies: a low-growth, highly cash-generative Nordic business, and a high-growth, non-cash-generating emerging market business.'

That's a good mix of cash flow and growth, agrees Poul Ernst Jessen, an Oslo-based analyst with Danske Bank (DANSKE.CO) who sees 25% upside for the stock. After all, Telenor's projected organic sales growth of 6% is double the average for European telcos and remains above that of comparable peers such as France Telecom, Deutsche Telekom (DT), and BT (BT), analysts say.

In part that's due to its continued opportunity in developing economies. Analysts note that markets such as Bangladesh are only 30% penetrated. And despite impending saturation in Russia and Ukraine, Jon Fredrik Baksaas, who has served as Telenor's chief executive since 2002, still sees growth potential.


'The question is how to stimulate more usage,' Baksaas says. One of his aims is to hook customers on over-the-air data downloads, given the subpar fixed-line telecom infrastructure in Russia and Ukraine. 'I believe we can develop usage in parallel with Scandinavia,' he says.

In-flight applications

Another growth avenue is rolling out more cutting-edge applications. Telenor, for instance, developed technology used by Emirates Airline for in-flight mobile-phone calling. The first such authorized service kicked off on Mar. 25 (, 3/25/08), ushering in the start of regular use of mobile phones and wireless data access aboard airplanes.

The in-flight service was provided by AeroMobile, a joint venture between Telenor and ARINC, a Maryland company specializing in transportation and systems engineering. Baksaas concedes that in-flight mobile won't add much to Telenor's bottom line in the short term, but says he's convinced there's a market. 'No one can afford to sit still in this industry; otherwise you will see your position erode pretty fast,' he says.

Indeed, Telenor has a long history of pioneering new services, including premium text-messaging, which turned out to be a cash cow for the industry. It moved early into video and is today the largest provider of TV services in Scandinavia. It was also among the first of the mobile operators to launch a separate company dedicated to mobile advertising. To be sure, advertising on handsets is still in the very early stages. But 'we want to try out new concepts, together with customers, and also to try to build a market,' Baksaas says. He also remains a believer in mobile Internet access: 'It's only a question of time.'

Complicated legal battle

Before Telenor can enjoy some of its future growth opportunities, it has to sort out the contentious legal squabble with Altimo. The two companies share ownership of Vimpelcom (VIP), the No. 2 mobile operator in Russia, and also jointly own Ukraine's top operator, Kyivstar. But Altimo alleges that when Vimpelcom tried to buy a rival Ukrainian operator called Ukrainian Radio Systems, Telenor resisted the move, costing Vimpelcom and its shareholders $2.7 billion in lost revenue. Telenor dismisses the charges. 'We see this lawsuit as having no merit at all,' Bakaas says. Altimo wasn't reached for comment.

Such legal and regulatory struggles are part of doing business globally, and Bakaas insists that Telenor, which now owns 12 different operators in full or in part, won't shy away from further foreign expansion. 'We are being as active and as dynamic as possible in looking for opportunities to extend our footprint, as well as bringing forward new service initiatives,' the CEO says.

Investors may undervalue Telenor, but Bakaas isn't sweating. 'What's sure is that we have now reached a size where it's certain we will play a strong role,' he says. 'That can be counted on.'

Schenker is a BusinessWeek correspondent in Paris.

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