Telecoms scramble for cash

Deutsche Telekom needs to build a warchest to stay ahead

More and more people are expected to surf the web via mobile phones.

Telecom companies are now scrambling to find the cash to pay for the licences which will allow them to offer these new service.

Deutsche Telekom is set to borrow $8bn next week in four currencies in a bid to build a warchest which will allow it to buy next generation mobile licences across Europe.

The sale of new licences in Europe is expected to cost 100 billion euros and companies are gambling that consumer demand for the new products will be worth the high price.

Mobile madness

European governments woke up to the fundraising possibilities of next generation technology when the UK auction left the Labour government £22.4bn richer.

Some governments - such as in France - are opting for beauty contests instead of auctions. In these, the licence is awarded on the basis of merit, not price. It was prompted to do this by fears that some companies could be priced out of the contest and that the eventual high cost would be passed on to the consumer.

Germany's telecoms regulator announced last month that 12 companies can join the bidding in its auction for third generation mobile phone licences.

The government hopes for a massive windfall from the auction. Experts estimate that mobile phone companies could be prepared to pay as much as 60bn euros ($55bn, £35bn) for the five licences on offer.

Bond bonanza

To be in with a chance, telecom companies have to have fairly deep pockets.

Earlier this month, Deutsche Telekom unveiled plans to raise $8bn in the bond markets, one of the largest-ever corporate bond issues.

Bonds are effectively IOUs.

Governments or companies borrow money and agree to pay a certain rate of interest (yield) for a period of time (maturity). When the bonds mature, the lenders or bondholders get the money back.

Deutsche Telekom is set to put the bonds up for sale next week.

The company was already expecting to have to pay a hefty interest rate on their borrowing.

Now a US credit rating agency Moody's Investor Service has threatened to downgrade its credit rating - an indication of creditworthiness - a clear signal to investors that the company is under pressure.

Deutsche Telekom's Ron Sommer has his eye on the US

The reason, say Moody's is "its increasingly ambitious intention to expand in the US, coupled with the uncertainties over a possible increase in financial risk".

Already, some analysts have questioned how much demand there will be for the bonds.

So far this year, Holland's KPN, Vodafone, France Telecom and WorldCom have launched bumper bond issues. Most of these bonds are denominated in dollars, as despite the introduction of the single currency the US corporate bond market is far bigger than the market in Europe.

But are there any investors out there who still want to lend money to telecoms companies?

"It's not a secret what Deutsche Telekom has been trying to do in Europe. They have been a couple of steps behind Vodafone and France Telecom in terms of their mobile footprint and are keen to correct that," an analyst at a US bank in London said.

He added that "there is always demand if the price is right".

Laura Kovach, a high-grade research associate at Boston -based Evergreen funds said: "With everyone coming to the market at once, it could take a toll on the company's ability to get through at a reasonable price," she added.

In the United States, the technology revolution has been largely funded by corporate borrowing on the bond market. Deutsche Telekom's big issue marks a key test as whether European companies will be able to take the same route.