Zurich, Dec. 19 (Reuters): Swisscom AG will repurchase a 25 per cent stake in Swisscom Mobile from Britain’s Vodafone Group Plc for 4.25 billion Swiss francs ($3.5 billion) in a long-awaited deal to fortify its home market position.

The debt-financed purchase, which is more costly than analyst expectations of around 3.5 to 3.75 billion francs, will boost Swisscom’s annual profit by around 180 million francs starting in 2007, Swisscom said in a statement on Tuesday.

The deal will enable Swisscom, which is majority held by the government, to strengthen its domestic position after the government blocked foreign takeovers, while for Vodafone, the proceeds will allow it to reduce debt.

Vodafone said it expected to record a gain on the sale of approximately £100 million ($195 million) for the year ending March 31, 2007. It said the deal would not materially affect its mobile revenue and profit margin outlooks for this financial year.

“The 4.25 billion Swiss franc cost is well ahead of expectations,” said analysts at investment bank Bear Stearns. “However, with EPS increasing by 9.7 per cent, the inefficient balance sheet repaired and returns set to increase in 2008, we believe the deal is broadly positive for Swisscom.”

Welcome outlook

Shares in both companies were barely changed at midday with Swisscom changing hands at 454 francs and Vodafone at 144 pence.

“The purchase price at 4.25 billion francs is about 0.6 billion francs higher than we thought,” said analysts at JP Morgan in a note to investors.

Analysts also welcomed Swisscom’s outlook for operating earnings of 3.9 billion francs for 2007.

Vodafone acquired the 25 per cent holding in Swisscom Mobile in March 2001 for 4.5 billion francs not long after the height of the telecoms boom.

Swisscom has sought to retrench at home after a shock government decision one year ago blocking major foreign takeovers.

Swisscom faces increasing competition, including from cable operator Cablecom, and falling prices, making it difficult for the cash-rich, state-controlled company to grow at home.

Swisscom said the deal would result in an increase in net income and equity free cash flow annually of around 180 million francs net, after deducting financing costs.

The Swiss government owns around 58 per cent of Swisscom.

Swisscom said its net debt limit would remain unchanged at 1.5 times earnings before interest, tax, depreciation and amortisation, thus guaranteeing a high level of strategic flexibility.

The transaction will be debt financed and is expected to be completed on December 20.