LONDON -- It is a measure of the concern about the spiraling cost of third-generation mobile-phone telephony that when
( BTY) was forced to abandon its bid for a 3G license in Italy's auction on Monday, its shares climbed sharply.
The shares of the other bidders in the auction such as
also rose, since the decision by BT's Italian venture Blu to drop out ended the auction after only two days. Bids totaled only $10 billion, well shy of the amounts raised in the British and German auctions.
This is all potentially good news, but the caution in the Italian auction is unlikely to bring either BT or the rest of the sector back into favor. The mobile operators still have to spend at least the same amount that they spent on the licenses again to build the infrastructure for 3G, which will offer users data services as well as voice. Many are heavily in debt, and more downgrades from the rating agencies are possible. And BT, among others, has home market problems to solve.
BT's Kind of Blu
Blu pulled out of the auction because BT and the other Italian shareholders of Blu --
-- failed to agree on the terms by which BT would increase its stake in the consortium to more than 50% from its current 20%, despite intensive negotiations over the weekend.
Investors reacted favorably to the news, presumably feeling that BT has avoided paying a lot of money that may yield little in return, at least anytime soon. The shares initially rose 3.5% to 739 p, but by midafternoon had retreated to stand up 5p at 720.
Still, the market's upbeat reaction belied some concern about BT's pullback. "We here are keen for BT to expand into mobile and so from our point of view this is negative," says Paul Mount, analyst at
, who currently has BT's rating under review. (Nomura has no investment banking relationship with BT.)
For the other bidders in the Italian auction, Blu's exit was a gift, as it meant there remained only five bidders left for five licenses, thus ending the auction. The Italian government had been hoping for a windfall of more than $20 billion, but instead ended up with only $10 billion. This is minuscule when compared with the $46 billion netted by the German auction and the $35 billion netted for the U.K.
Debt Piles Up
Although it appears the operators needed less than the 150 billion euros ($126 billion) estimated by
Moody's Investor Services
to obtain the licenses, the rating agency reckons they will still have to invest 150 billion euros in network construction over the next three or four years.
It's these kinds of figures that have investors skittish about wireless operators. The
FTSE telecom services index
is down 38% this year, with BT's shares down more than 50%. And Karen Egan of
sees further downside for the former monopolies because of funding problems.
Egan expects 2001 to be the most taxing year for these telcos, with around 55 billion euros of cash to be raised by
( DT) and BT to avoid further downgrades by the rating agencies.
BT's debt problem is particularly severe, with pro forma debt for 2001 expected to be around
30 billion. That number would put it well in excess of the net debt-to-EBITDA level of below 3.0 that the rating agencies require for a single-A rating.
Trouble at Home
Aside from its debt problems, BT is facing huge pressure in its domestic market. It has been castigated for its reported covert policy of "walking slowly backwards" with regards to the unbundling of the local loop. From next year, BT will have to offer access to many of its local exchanges to competitors such as
( COLT) and
In a newspaper interview this weekend, Erkki Liikanen, the European commissioner responsible for telcos, said that the European Union would take the U.K. government to court if it fails to force BT to do this. Six of BT's competitors told the government that they too would consider legal action if BT does not honor its pledges.
Considering that BT couldn't get on with its partners in Blu, the chances of it working well with its enemies are not good.