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Friday, 18 August, 2000, 15:41 GMT 16:41 UK
Telecoms firms caught in costs spiral
Man talks on a mobile phone
Consumers may bear the brunt of new licence costs
Shares in some of Europe's biggest telecoms operating companies slipped on Friday as investors continued to show unease about the high prices paid for third-generation mobile phone licences.

But shares in telecoms equipment suppliers rallied amid speculation that they stood to gain from big spending on network expansions.

On Thursday six bidders agreed to pay about $46bn for German licences but analysts said the companies would have a tough time generating a return on their investments.

Some of the companies involved appear to have come to the same conclusion and may try and pass the cost on to the consumer.

Price too high

Five hours after the German auction closed, the Hong Kong-based conglomerate Hutchison Whampoa withdrew from one of the winning consortia, saying too high a price had been paid for too restricted a licence.

Another of the winning bidders described the price levels reached as "insane".

The record-breaking German auction had followed a similar contest in the UK which raised $35bn and a race for new French licences.

With the next four months due to see mobile licences awarded in Sweden, Italy, Belgium and Switzerland, there is little sign of an end to spending for telecoms firms.

Difficult business case

Analysts said it could take companies many years to recoup the cost of the licence and network investments.

"It is very difficult to make the business case [for the spending]," said Doug Hawkins, telecoms analyst at Japanese bank Nomura.

"The very high prices [paid for new mobile licences] will encumber the balance sheets, force up the cost of capital and bear down on share prices," he said.

But he said the bidding wars were a matter of survival for the companies with existing mobile interests, saying they could not afford to withdraw to the sidelines.

Running up debts

Telecoms companies' credit ratings, generally high, could also be knocked by the big debts being built up, analysts said.

British Telecommunications - a German licence winner through its Viag Interkom joint venture - was one of those reported to be considering sell-offs to help cut the rising burden of debt.

After paying more than initially anticipated, both for the German licence and to double its Viag Interkom stake to 90%, BT's debts increased by about 50% to nearly 30bn ($45bn).

Chief executive Sir Peter Bonfield was reported as saying BT would consider floating its mobile phone units in order to unlock value. It was already preparing for the flotation of Yell, its telephone directories business. It was also reported on Friday to be in early talks about merging with US carrier AT&T.

Heavy spending

Analysts said each of the new German licence holders would have to spend heavily on network expansion on top of the approximate $8bn licence cost.

Spectrum Strategy Consultants estimated that operators would need to spend about $45bn to improve network quality and security if new services were to be successfully introduced.

At present, many European networks are inadequate even for voice communications.

Spain's Telefonica - which controls German licence holder Group 3G - said it would spend $6.1bn on equipment and hope to break even in 2006, four years after operations were due to begin.

BT would be spending about $9.1bn on its new German mobile network, Spectrum said.

Price pressure

Mr Hawkins said the amounts of debt would become "untenable" for many companies in a background of severe price pressure from increased competition.

This was likely to lead to wide-ranging restructuring in the sector though analysts were divided about the precise direction this would take.

Many believe that non-telecoms companies - such as banks, utilities, retailers and internet service providers - will play an increasing role in the mobile market, bringing their established customer bases to operators with network capacity to fill.

There were also varying opinions on the implications for consumers.

Some analysts said fresh competition in the market would keep prices low and new 'exotic' services would soon proliferate offering consumers more choice.

But consumer groups sounded a note of warning, saying that the high cost of the licences would inevitably be passed on to consumers.

Key stories

Consumer choice?



See also:

18 Aug 00 | Business
17 Aug 00 | Business
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