By Leila Abboud and Sophie Sassard
PARIS/LONDON (Reuters) - Tele2, which lost a December auction for the mobile spectrum it needs to run its Norwegian network, is in deal talks with the winner, Access Industries, in a bid to salvage its local operation, said four people familiar with the matter.
Tele2, which is Norway's third-largest mobile operator behind Telenor and Teliasonera, has spent nearly 400 million euros since 2011 to build a business that now has 1.2 million customers and some 1,700 mobile towers.
But Access Industries, a holding company owned by Ukrainian-American billionaire Len Blavatnik who also owns Warner Music Group, deprived Tele2 of the industry lifeblood - mobile spectrum to carry its customers' data and calls over its network - by winning an auction with a $115 million bid for airwaves in the 800, 900 and 1800 megahertz bands.
The two sides are now in talks, the sources said, but are unlikely to reach a deal before Tele2 results on Friday. Options on the table include Access selling its spectrum to Tele2, Access buying Tele2's Norway operation, or some type of licensing of the spectrum to Tele2.
But Access would only sell its spectrum to Tele2 on condition that it also buys ice.net, a small Norwegian mobile broadband company owned by Access. Nor is Access willing to pay a high price for Tele2's Norway unit, two of the sources said.
Tele2 assets in Norway are worth less without a robust spectrum portfolio because it would have to rent capacity on rivals' networks instead of carrying its own, dampening profit margins. Analysts value the unit at 2.3 to 4.0 billion Swedish crowns ($350-610 million), down from about 5 billion before the auction.
Tele2 is also looking at other options too, such as buying spectrum in the next auction, but it remains unclear whether the government will be selling any this year or next.
Tele2 could also seek an agreement to put its mobile traffic on Telenor or Teliasonera's networks, analysts said, although this would result in a less profitable business. It was unclear if such talks were underway.
Investors have been waiting for an update from Tele2 on its plans since the botched auction, and have sent shares roughly 11 percent lower, shaving more than $500 million off its market capitalization.
Tele2 was so confident it would get the spectrum that not only had it invested massively to build most of the network that would channel the speedy frequencies, it also threw a party on the night before the auction's results, said two of the people.
"There has been very little feedback from the company since the auction, other than the fact that they acknowledge that Norway is a big mess, and that they are trying to figure it out," said a top 20 Tele2 shareholder.
For its part, Access is willing to build a Norwegian mobile network from scratch to use its spectrum, the people said, although it would take more time. It plans to adopt a wholesale strategy and rent out network capacity to the dozens of local broadband companies in Norway who want to offer mobile services.
Access is also speaking to Telenor and Teliasonera to see if network sharing deals would be possible, said one of the people.
Whether Tele2 and Access can arrive at an agreement will depend on if they can agree on a price for one to buy the other out, the people said.
In a further twist, the owners of the companies - Len Blavatnik for Access and Cristina Stenbeck for Kinnevik, the parent company of Tele2 - are business partners and know each other personally. Blavatnik invested $400 million in Rocket Internet last year, a German e-commerce venture capital fund in which Kinnevik is the largest outside shareholder.
Blavatnik and Stenbeck have spoken in recent weeks about the Norway situation, said two of the people.
Some analysts and investors believe the two billionaires will strike a deal, while others expect Blavatnik to play hardball given what he sees as Tele2's weakened position after the auction.
Barry Zeitoune, analyst at Berenberg, said Tele2 was not actually in as weak of a negotiating position as it appeared. Tele2's business is certainly less valuable without the spectrum, he explained, but Access' spectrum is worth more in a three player market in which they could avoid building a network and subscriber base from scratch.
"Access needs Tele2 as much as Tele2 needs it," he said.
"It's a case of 1+1 equaling more than 2, so you'd expect them to be able to arrive at an agreement on price."
Kinnevik, the holding company that is Tele2's largest shareholder, declined to comment.
Tele2 declined comment.
A spokesman for Access did not return a request for comment.
($1 = 6.5302 Swedish crowns)
(Additional reporting by Sven Nordenstam, Mia Shanley, and Olof Swahnberg; Editing by Andrew Callus)