Lex: Nokia
Published: April 3 2001 19:51GMT | Last Updated: April 3 2001 19:56GMT
There are many ways to buy growth and market share; one is to give customers the money to buy your products. Companies call it vendor finance. And it is particularly useful when no-one else will lend your customers money because they already have huge debts and the products they are buying are unproven: as is the case with Nokia and third generation mobile.
In the past three days Nokia has announced E2.75bn in vendor financing for 3G networks, taking its total exposure to roughly E4bn, up from E1.2bn at the start of the year. The company argues, with some justification, that it understands the technology risks better than banks, and so can lend prudently when they cannot. However, Nokia invariably takes on some operational risk too. Technology does not produce cash flows, businesses do. In any event, Nokia is lending between 130 per cent and 150 per cent of contract value, financing non-hardware costs as well. Since banks and capital markets are in no mood to take on this risk, it could remain on Nokia's books for years.
This is a risky game. It looks suspiciously as though Nokia is trying to engineer sales growth in networks at any cost in order to hit its ambitious financial targets. There are economies of scale in networks, and Nokia's balance sheet is slack. Using vendor finance to win market share is not necessarily a foolish tactic. But it should stick to big credit-worthy operators. Extending vendor finance to standalone 3G ventures such as Hutchison UK and MobilCom will not endear it to investors.
Lex: Sonera
Published: April 3 2001 19:58GMT | Last Updated: April 3 2001 20:02GMT
When a company loses 90 per cent of its value in little more than a year, the management has to review its strategic options. Such is the case at Sonera. The Finnish telecommunications operator is the worst performing stock in the Eurotop 300 index over the past 12 months. Where investors once saw a mobile technology powerhouse they now see a small country operator with a mature home market, huge debts and a hopeless third generation start-up in Germany.
Sonera cannot be blamed for sudden swings in investor sentiment. Kaj Erik Relander, chief executive, tried to sell out at the top of the market. However, he also fed the mobile internet hype which kept Sonera overvalued and prevented a deal from taking place.
Bidding with Telefonica for third generation licences across Europe proved disastrous. Sonera is now overstretched, with E6bn debt, more than 10 times consolidated earnings before interest, tax, depreciation and amortisation. Selling its stake in VoiceStream to Deutsche Telekom for E2.5bn (assuming it completes) should stave off bankruptcy. But Sonera has no future as an independent company.
If Sonera cannot find a partner among the pan-European groups, it should sell to Telia and create a regional Nordic operator. Telia has a strong balance sheet but lacks international exposure. Its strength in fixed line telecoms would complement Sonera's in mobile; there is little overlap. Such a deal would not resolve Sonera's problems in Germany, but this is already discounted in its price. And while Finnish pride might take a beating, investors could expect a reasonable premium
LETTERS TO THE EDITOR: Isle of Man trial keeps Europe in the 3G race
Financial Times; Apr 4, 2001
By MIKE PARR
From Mr Mike Parr.
Sir, Alan Cane (The 3G window of opportunity", March 29), and Dan Roberts and Richard Waters ("Threatened by a younger generation", March 28) raised interesting issues concerning third-generation telecommunications.
Far from Europe being behind in the "3G race", British Telecommunications is launching a 3G service, on a small scale, this year in the Isle of Man. Most European operators are now building 3G core networks. Base stations, their siting and the cost of installation are an issue. Like all issues, they will be resolved. The claim that the Universal Mobile Telephone System will perform worse than the General Packet Radio Service is unfounded. There are unresolved issues concerning battery life, handset size and shape. However, UMTS will be an improvement on GPRS data rates which offer in the range 20kilobits per second to perhaps 40kbps (compared to the 9.6kbps of GSM). I would also question the statement "CDMA2000 works - today". This assertion could also apply to UMTS. Several of the European UMTS manufacturers have made similar demonstrations (albeit not in public) connecting base stations to terminals such as laptops. European handset manufacturers may appear to be lagging the Japanese in the development of 3G handsets (for example, NEC will supply handsets to BT for the Isle of Man trial). However, appearances can be deceptive. Nokia requires visitors to sign a non-disclosure agreement when entering its premises. Perhaps this is the same company that is going to give its competitors advanced notice of its progress and proposed launch dates for 3G products? I agree that UMTS will initially be "islands in a sea of GPRS"; but that is how it was planned. The same problem faces CDMA2000 but phones based on this standard will have to roam in a multi-standard environment in the US, as opposed to the dual standard environment, UMTS/ GPRS, in Europe.
Mr Roberts' and Mr Waters' article raised the reasonable point: why not use other mobile technologies. Unfortunately, these will not work on a train, an increasingly important aspect of business travel. Neither will they work in a car. In addition these other technologies do not support roaming. Other practical points include how to pay for such facilities (to whom?) and how to implement these systems on a consistent, pan-European basis.
In 1992, when GSM was being launched, there were a great many concerns. However, it went on to become a success, showing that competitors can work together to produce a highly functional system. UMTS is well on track to do the same.
Notwithstanding current problems, the battle between CDMA2000 and UMTS is over in Europe. However, it is far from over in the US. Global success for 3G will depend on how well it is accepted elsewhere. Most of these have chosen GSM. My experience suggests that happy clients bring repeat business.
Mike Parr, PWR, 66 rue de la Limite, 1970 Wezembeek Oppem, Belgium
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