TELIA-SONERA MERGER WALKS REGIONAL POLITICAL TIGHTROPE

Historic cultural tension could derail consolidation plans

On paper, the merger between Sweden's Telia and Finland's Sonera should form a Nordic powerhouse that controls the telecom affairs of Northern Europe in the Baltics. In reality, the union could run into trouble.

Unlike most mergers in which regulation and financials are the usual stumbling blocks, the obstacle standing in Telia and Sonera's way is politics. If the two can pull it off, they may set an amazing precedent that could lead to the creation of a pan-Scandinavian mammoth in Europe that would not only survive expected consolidation, but could emerge as one of the continent's dominant carriers.

The two former state-owned carriers put pen to paper last week, announcing a stock trade-off that would create a new Stockholm-based cross-border carrier with revenue of $7.8 billion and control more than 8.8 million fixed and 22.7 million wireless lines throughout Northern Europe. Both companies' governments, which still own majority stakes in their country's carriers, signed shareholder agreements committing to the deal, leading Sonera Chairman Tapio Hintikka and his Telia counterpart Lars-Eric Petersson to promise a merger by summer once all regulatory hurdles are cleared.

"These discussions about consolidation on the European level and on the Scandinavian-Nordic level have been going on and on and on," Hintikka said at a press conference in Helsinki last week. "Finally we have something that is not just talking."

There may be a lot more talking going on before the deal is done. While analysts predict little regulatory problems from the European Union and other outside regulators, Finland and Sweden's own governments and more specifically their government representatives may muck up the proceedings.

Yankee Group analyst Camille Mendler pointed to Telia's failed merger talks with Telenor in 1999, the central stumbling point being a comment that a prominent Swedish politician made about Norway's foreign policy.

"There are a lot of cultural tensions that exist between all European countries, and they date back centuries," said Mendler, the director of fixed telecom for The Yankee Group. "How they address those tensions will determine if this merger is a success."

Both Swedish and Finnish governments have sworn to lessen their respective 71% and 53% ownership stakes in their national carriers, but with the current state of both companies' stock prices, it's unlikely to happen soon. Until then, both governments will have a critical say in merger talks. It's not infeasible for either to balk if public opinion starts souring on the deal, said Mike Cansfield, principal consultant for Ovum in London.

"Both parties will have to ensure they are getting their share of the spoils. Otherwise they'll have to explain it to their voters," Cansfield said. It's critical for both carriers to spin the merger as one of equals, despite the fact that Telia is acquiring Sonera, Cansfield said. Telia is twice as large as its Finnish neighbor, and its stockholders will control 64% of the new entity.

The carriers also must play up the more publicly visible aspects of the merger. Sonera's Hintikka will become chairman, leaving Telia's Petersson as deputy chair. While the new CEO will be selected from outside both companies, the second in command will be Harri Koponen. In an attempt to overcome cultural barriers, the companies have said English will become the corporate lingua franca of the new venture. But-and this is a big but-the new corporate headquarters will be in Stockholm, which politically may become the deal's biggest stumbling block, Cansfield said.

If issues of culture, politics and nationalism weren't enough, the deal might find it has two more forces to contend with in Ericsson and Nokia. The powerhouse vendors reside in Sweden and Finland respectively, and Telia and Sonera have historically shown preference to their native vendors. While analysts don't expect Ericsson and Nokia to weigh in on the deal-at least not publicly-vendor loyalty may be no small factor if the deal gets hung up.

Regardless of the stumbling blocks, Telia and Sonera will have to reach some kind of agreement or risk opening themselves up to acquisition, analysts said.

If the Sonera and Telia deal goes through, however, it could spur its stubborn Scandinavian neighbors Telenor, Tele Danmark and even KPN and Belgacom into negotiations to create a pan-Scandinavian carrier, which would fend off the expansionist intentions of BT, France Telecom and Deutsche Telkom, said Julian Rawle, a senior market analyst with Pioneer Consulting.

"If this wouldn't happen now, it will happen eventually," Rawle said. "We're going to see a polarization in Europe in the next five years, where only a few carriers are controlling all European markets. Telia has had international ambitions before. I could easily see it trying to assume a place among those few dominant carriers."