Euro 3G license costs could speed up market
totaltele.com
By Kirstin Ridley, Reuters
03 July 2000
An estimated 170 billion euro ($163 billion) bill facing European telecoms companies for new generation mobile phone licences may be a blessing in disguise for savvy telecoms investors.
Analysts say worries about the cost burden of high speed UMTS (Universal Mobile Telecommunications System) services, which have sparked a sharp telecoms sell-off since March, may be overdone and some stocks now offer compelling value.
But with lengthy and expensive UMTS licence auctions ahead, analysts say prices could yet fall further before the sector's future growth potential is again recognised.
For operators - keen to try and recoup heavy network and licence investments as quickly as possible - are expected to race to bring forward service launch dates, ensure that services work, market them aggressively and get pricing right.
"I think the high cost of these licences is actually going to result in the industry's development being accelerated by six months or so over the next two to three years," said Jo Oliver, telecoms analyst at Lehman Brothers.
The pan-European Dow Jones telecoms stock index, trading at 686 on Friday, has dived to 638 from a record 1,062.85 after Britain's UMTS auction in April raised a hefty 22.5 billion pounds ($34 billion) and triggered worries about how firms would pay for other UMTS licences and services.
Analysts say companies such as cellphone giant Vodafone AirTouch, trading at 265-3/4p on Friday, and Finland's Sonera, trading at 47.75 euros, currently offer "fantastic value".
But a Dutch UMTS auction looming next week and Germany to follow suit on July 30, few expect shares to start recovering for another two or three months.
Although cellphone groups are trading on average at twice the EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) multiples of fixed-line telecoms companies, analysts say the premium is justified
because of their faster growth and new product pipeline.
UMTS AUCTIONS TO DRIVE CONSOLIDATION
The expected high costs of UMTS auctions has spawned new alliances - and broken old ones - as companies link up to bid for a small number of coveted licences on offer. And analysts expect a fresh round of mergers to also help
underpin shares.
"I think people should be buying most of the sector," said John Tysoe, telecoms anlayst at WestLB Panmure. "There's a concern about whether companies can afford to buy licences and then build the network. Some of them can't.
"But I think this will drive consolidation in the short term, with the strong players doing the consolidating and the weaker ones being taken out at a premium."
The trick is to avoid picking those who fall between the two stools - possibly companies with a successful franchise at home but little else to offer a prospective buyer. Analysts suggest the likes of Swisscom, TeleDanmark and Sweden's Telia.
Although a battle for four to six German UMTS licences is expected to spark the most expensive auction on the continent - with Italy close behind - some analysts believe auctions may be less bloody than Britain's high stakes bidding war in April.
"The UK auction was the first. At the beginning, everyone still had everything to play for. There was still a real chance of getting a complete or near complete European
footprint," said Tysoe. "That is now only true for around five companies."
Vodafone, Deutsche Telekom, British Telecommunications, France Telecom/Orange and the industry maverick Hutchison Whampoa of Hong Kong are expected to be key contenders for a pan-European footprint.
They are also likely to be the main consolidators.
European governments are expected to raise between 120-170 billion euros for UMTS licences, with some analysts estimating that operators will then have to pay another 175 billion euros to equipment makers such as Sweden's Ericsson and Nokia of Finland to roll out networks and services.
The success of UMTS mobile services, such as high speed Internet and video services, hinges partly on the availability of infrastructure and mobile devices such as handsets.
For the operators, this can be frustrating - and it is also where size and scale matters.
"If anyone is going to able to get their hands on handsets or any other kind of mobile device, it is going to be Vodafone," said Oliver. |
