The Coming Week in Europe: Telecom Investors Should Head for the Shade

Regulatory problems and pricey mobile licenses could cause some nasty sunburns.
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BERLIN -- Telling people the European telecom sector merits attention is like pestering them that the sun in the Riviera is hot. Then again, everybody needs to be reminded to slather on some sunscreen before heading to the beach.

Well, put away the cocoa butter and bust out the zinc nosecoat, because there's enough rumormongering and maneuvering at the moment to make Europe's big telco stocks plenty volatile in the coming week.

Warnings from

Ericsson

(ERICY)

, megabond issues and takeover talk for

Deutsche Telekom

(DT) - Get Report

and continuing regulatory problems are just the beginning of what could add up to a nasty sunburn for investors.

Besides the ADRs of specifically affected shares, European mutual funds that like to favor technology, media and telecom stocks, such as the

(JPEEX)

J.P. Morgan European Equity fund and the

(MAEFX) - Get Report

Merrill Lynch Euro A fund, could also experience some fair swings next week. "It could get bumpier than usually," says one Frankfurt-based trader.

Foremost in the minds of European telco investors likely will be the implications of the apparently dead merger between

WorldCom

(WCOM)

and

Sprint

(FON)

, which has fallen afoul of U.S. and

European Union

regulators. On Thursday, Deutsche Telekom's shares tanked 8% after a report the former German monopolist was preparing a $100 billion bid for Sprint.

DT has made no secret it desires a large presence in the U.S., and with its burgeoning war chest, it is quickly becoming the favorite to scoop up the pieces of the failed deal. Other factors could play havoc with Telekom's share price next week as well, however. After just completing the largest-ever corporate bond offering, investors could get jittery over the prospect of a downgrade of the company's debt rating, and the entire industry continues to be apprehensive about the cost of third-generation universal mobile telecommunication system, or UMTS, licenses.

Besides the fallout from its moribund merger with Sprint, third-generation licenses are plaguing WorldCom as well. The company is mixing things up across the Europe by revamping its plans for UMTS licenses.

Last week the company pulled out of the upcoming German auction, complaining the cost would be prohibitively high. That immediately led to speculation WorldCom may team up with

Swisscom

(SCM) - Get Report

to make a joint bid. WorldCom said giving up on a 3G license had nothing to do with the Sprint debacle, but apparently the company is reassessing its entire wireless strategy. Its new strategy might perhaps involve partnerships with firms that get the pricey UMTS licenses in Germany, the U.K. and elsewhere.

As soon as WorldCom said it would no longer compete for a German license, the rumor mill began to chew on talk that the German government was now considering limiting the number of UMTS licenses it will issue, to ensure it receives what it thinks it deserves for them.

The CEO of Sweden's Ericsson began all the hullabaloo last week by saying the high costs of 3G could begin to slow down the industry's growth. That led to a huge selloff of sector shares on Thursday, but things got jerked in the opposite direction Friday, amid positive comments by

Goldman Sachs

for Ericsson,

Nokia

(NOK) - Get Report

and French telco-equipment maker

Alcatel

(ALA)

.

With all the back and forth, how things will play out next week is anybody's guess. Hence the need to perhaps limit one's exposure or at least become a bit more selective. "The telecoms' branch is hobbled at the moment by the massive outlays for the UMTS licenses," says Robert Halver, an equity strategist for

Delbrueck Asset Management

in Frankfurt. But telecommunications-equipment makers and suppliers such as Alcatel will actually "benefit from UMTS, which will require large investments."

In short, investors will be smart to find a safe shady spot out of the telecom sun this week.