Euro Bureaucrats make Poor Businessmen.
Huge Debts Hobble Europe's Telecoms
By William Drozdiak
Washington Post Foreign Service
Thursday, March 29, 2001; Page E01
BRUSSELS, March 28 -- Europe justly boasts of supremacy in at least one major
high-tech industry, the business of mobile telephones.
Britain's Vodafone is the world's largest network operator, Finland's Nokia is the leader
in making mobile phones and Sweden's Ericsson is considered the top equipment
supplier. More than 60 percent of the people living in the European Union own cellular
phones, compared with about 40 percent in the United States.
So when European nations held a series of auctions last year for the rights to transmit
over airwaves to offer new high-speed Internet services on mobile phones -- known in
industry jargon as third-generation or "3G" wireless services -- the major telephone
companies bid up the licenses with abandon, assuming incalculable profits to come.
For governments, the auctions seemed a convenient and painless way to share in the
bounty. They collected more than $100 billion in license fees.
But now those prices seem exorbitant by any conventional measure, and the profits seem
far from assured. Credit agencies promptly slashed the ratings of most of the winners, and
their stocks plummeted.
What once seemed to be a government coup now looks like a policy disaster that imposed
an intolerable burden on some of Europe's most prominent enterprises, triggered a wave
of bankruptcies and threatened the banks behind the spending.
With the telephone companies now owing enormous fees and their stocks far below their
highs, the prospect of spending another $100 billion or so to build the 3G networks has
pushed many to the breaking point.
The chief executives of Deutsche Telekom, France Telecom and British
Telecommunications -- three former state monopolies that rank among the leviathans of
Europe's telephone industry -- are all under pressure to leave their posts for having
accumulated huge debts over the past year.
Some financial analysts believe it will take at least a decade for those companies to
recover, if they ever do.
"Europe has shot itself in the foot," said Peter Cochrane, BT's former head of technology.
"These auctions were a really good study in madness. It was a bit like lemmings going
over the edge of a cliff." He predicted that 3G technology will be a bust and that those
companies -- once regarded as Europe's bluest chips -- will collapse under the strain of
their debts.
BT Chairman Iain Vallance and Chief Executive Peter Bonfield are facing a revolt by
shareholders who want them ousted for leading the company into such a parlous
condition. BT's shares have lost two-thirds of their value, debt has soared to $43 billion
through its aggressive pursuit of 3G licenses, and its credit rating is now threatened with
junk bond status.
Similarly, France Telecom's chief executive, Michel Bon, is struggling to appease
investors who have watched the value of their stock plummet by 75 percent this year. Bon
has tried to keep creditors at bay by selling off assets to pay down about $55 billion in
debt, but a recent spinoff of its wireless operator, Orange PLC, reaped only $6 billion. As
a result, Bon was forced to launch the biggest corporate bond sale in history, worth $16
billion, to raise as much money as possible before credit markets shut their doors.
And at Deutsche Telekom, chief executive Ron Sommer has been waging the same battles
-- trying to cope with $54 billion in debt, lawsuits from investors and credit downgrades
that have reduced confidence in his stewardship.
One of the biggest problems faced by Europe's three major phone companies -- which
together accumulated more than $120 billion in debt over the past year -- is the danger
that their obligations will undermine their ability to compete with less-encumbered
foreign operators. Japan, for example, awarded its 3G licenses for virtually nothing,
which will give national champions such as NTT DoCoMo a big advantage in the race to
supply advanced wireless technology to business.
Just a year ago, no price seemed too high to pay for the licenses. But now, doubts have
arisen about when 3G phones will reach the market and whether they will ever be
profitable enough to justify the enormous investment.
The credit crunch facing Europe's telecom industry is rippling across the whole economy.
Banks have been getting nervous about $200 billion in loans to the phone companies,
particularly after an alarming report recently by Morgan Stanley Dean Witter titled "The
Telecom Debt Iceberg." The fact that the companies are clamoring for another $90 billion
to $115 billion to build their new wireless franchises -- when the global economy
appears headed for rough times -- arouses fear of future defaults.
Fearing that Europe may lose its global primacy in mobile telephone service because of
what some portray as the greed of governments to collect license fees, the EU's executive
commission has urged the phone companies to pool resources in building 3G systems.
But Ewan Sutherland, head of Europe's leading consumer protection group in the
telecommunications industry, warns that "there should be an obligation to show that
there's a clear benefit for the user" in stifling free market competition and allowing the
phone companies to collaborate to ease their debt pressures.
"There should be some safeguards to protect the consumer and permit enough
competition," said Erkki Liikanen, the EU's commissioner for information technology.
"But at the same time, investors in the wireless sector need to know that Europe has a
long-term commitment to success in the field of third generation networks and that we do
not want to add to the burdens on the operators." |
