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By Harro Ten Wolde and Leila Abboud
BARCELONA, Feb 25 (Reuters) - Swedish group TeliaSonera has to take action on Yoigo, its Spanish mobilebusiness, as it is currently too small to compete effectively,Chief Executive Johan Dennelind said on Tuesday.
"Being number four with a 7 percent market share in aconverged market, where you really don't have scale, of courseis not great for long-term profitability or sustainability," hetold Reuters at the Mobile World Congress industry fair inBarcelona.
"We need to find a way to move Yoigo to a sustainableposition."
Finding a solution for Spain's smallest mobile operator, inwhich the Swedish firm has a 76.6 percent stake, was a key partof the strategic review which began when Dennelind took the helmin September.
Yoigo has struggled to recruit customers and turn a profitsince its creation in 2006. Last year it added 136,000 customerson a net basis, compared to 394,000 in 2012, while mobileservice revenue actually shrunk, according to Berenberg.
Analysts say Dennelind now has several options: sell Yoigooutright to a rival like Vodafone or Orange, add bulk with a tie-up with domestic broadband group Jazztel, or merge it with Orange's Spanish business, thesecond-biggest operator behind Telefonica.
Dennelind declined to comment on specific options butacknowledged that something had to be done as Yoigo faced "achallenging future with its current position."
"Making Yoigo future-proof requires us to be active becauseit needs both investments organically but also for us to look atopportunities as they come up," he said.
"TeliaSonera has a good financial position, which gives ussome flexibility if and when opportunities arise."
And after four years of economic recession, Spain's telecoms sector looks set for a period of consolidation, industryexecutives and bankers predict.
Most immediately cable operator Ono is preparing for apossible share market listing and Vodafone has also expressed aninterest in buying it as part of a move towards bringing fixedand mobile telecoms services together.
The rising popularity in Spain of deeply discountedall-inclusive bundles of fixed and mobile phone, television andbroadband services, which market leader Telefonica began pushing in late 2012, has hit Yoigo hard.
In 2013 TeliaSonera's Spanish business had a profit marginat the level of earnings before interest, tax, depreciation andamortisation (EBITDA) of 7.3 percent on net sales of 9.5 billioncrowns, and had a book value of 2.549 billion Swedish crowns($392 million) as at the end of 2012.
TeliaSonera sought to sell Yoigo in 2012 but bids fromVodafone and Orange were dismissed as too low.
Instead analysts at Berenberg bank estimate that a purchaseof Jazztel could cost TeliaSonera about 3.1 billion euros,taking its net debt to EBITDA ratio to 2.3 times.
"TeliaSonera can afford this deal," the analysts said.
Dennelind declined to say how much time management has inSpain to do something with Yoigo but expressed a sense ofurgency. "I am very impatient on building a future proofbusiness. That is my nature."
Shares in TeliaSonera were down 0.3 percent at 50 crowns by1613 GMT on Tuesday, valuing the company at around $33.3billion. The shares are down 7 percent so far this year comparedwith a 2.6 percent fall in the Stoxx Europe 600 telecoms sectorindex.
