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Strategies & Market Trends : Gorilla and King Portfolio Candidates

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To: EnricoPalazzo who wrote (41041)	3/28/2001 10:31:07 PM
From: BDR	Read Replies (1) of 54805

3G may be coming but the question seems to be whether anyone will be able to make any money from it in the next decade. From TheStreet.com, about two-thirds of the way through the article: thestreet.com Brett D. Fromson: How much do you expect 3G to cost? Ravi Suria: I look at 3G as a new project for the global industry. I don't believe it happens via individual companies. At the end of the day, you'll probably have four to six global companies offering end-to-end solutions via 3G wireless. We conservatively expect that to cost $300 billion; $150 billion is in buying the spectrums at auction, and the remaining $150 million is in build-out costs. Brett D. Fromson: $300 billion is a lot of money. Ravi Suria: Yes. If you assume that the $300 billion is financed 50% by debt and 50% by equity. Say $150 billion at 8% for the debt. That's $12 billion a year in interest costs. The entire industry is not supposed to generate revenues of $12 billion from 3G for four years and incremental cash flow for seven years . So, what spooked the bond market is the fact that the old wire-line businesses that are in decline will have to sustain the interest payments on 3G for the next seven years. The repayment of the debt and ultimately the value flowing to equity holders is much further off. Brett D. Fromson: Are there any historical comparisons? Ravi Suria: I compare 3G to prior massive capital expenditures in history like the building of the Interstate Highway System or the electricity grid or the nuclear reactors. All these projects required a lot of spending initially, but the reason the industries survived over the next 30 to 40 years was that they were regulated, and thus cash flows to repay the initial investments were guaranteed. This time you're borrowing to spend the money and letting loose a bunch of companies in a highly competitive free market under disinflationary pricing and telling them to make enough money to repay the original investment. This is an experiment that has never been tried before. It's hard to see a happy ending to this experiment under the current spending scenario. Brett D. Fromson: When did it become apparent that the old-line companies were in no shape to take over the new-era guys? Ravi Suria: In April 2000, with the British auctions, when companies spent $35 billion just buying spectrum. Six weeks later they spent about $45 billion in Germany. Suddenly all these costs became a reality, and the bond market fell apart. That was when debt spreads exploded across the board. It became apparent that the ability of the potential Old Economy buyers to take over the debt of the new companies had substantially deteriorated in the past three years. You can see the debt problems of WorldCom and AT&T.

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