LONDON -- "Not more money!" the market cried when U.K. telecommunications company



last week suddenly announced another share issue to raise funds. Inevitably, the shares fell and illustrated to many exactly why Europe's alternative carriers such as



Colt Telecom


have so massively underperformed the market for the past six months.

Yet many analysts are now recommending their clients invest in these telcos for the very same reason that Energis was raising the money -- digital subscriber line, or DSL, growth potential. This broadband technology is, by some estimates, expected to create a market worth some $7 billion in the medium term. With the necessary investment, these alternative carriers would be well placed to take more than 50% of that market, analysts believe.

For these carriers, DSL presents an opportunity to do far more than simply provide high-speed Internet access. These operators can use DSL technology as a means of providing value-added services to small- and medium-sized companies such as video conferencing, Web hosting and intranets.

The smaller carriers will be able to grab market share from the large former telecom monopolists because they are specialists in an industry previously dominated by generalists, are technologically innovative and are customer-oriented, believes Bill Dixon, analyst at

Robertson Stephens

, who rates both Energis and Colt as buys. (Robertson Stephens has no investment banking relationship with either firm.)

Julie Lamirel of

Lehman Brothers

agrees. "DSL is the right technology at the right time," she says. Once regulatory issues are addressed, capital expenditure for DSL is limited compared with laying fiber optic pipes so it can be rolled out relatively quickly. Also, DSL is perfectly suited for addressing small- and medium-sized businesses, which Lamirel estimates will account for two-thirds of the growth in the fixed-data market over the next 10 years.

So while new share issues by alternative carriers may be dilutionary in the short term and push down share prices, the capital raised could give the alternative carriers the muscle they need to grab market share long term. This could make for a buying opportunity now.

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Overall, the situation with DSL in the U.K. is somewhat similar to that in the American market: The amount of talk about DSL has not been matched by execution. Together with the generally negative sentiment in the market toward telecom stocks and a spate of profit warnings from the alternative carriers, it should come as no surprise that Salomon Smith Barney's

European Alternative Carrier

index has fallen 50% in the past six months. Energis has fallen 25% in the past six months and Colt is down 42%.

However, Energis's decision to raise $560 million to finance its move into DSL is a clear sign that it believes the wind is finally blowing its way.

So what has changed?

In Europe, the problem has always been the former monopolies. Although in Germany a combination of political and regulatory will to unbundle the local loop has pushed the process forward, in places like the U.K. and France it has been two steps forward, one step back. In fact,

British Telecom


was accused in a local newspaper last week of operating a covert policy known as "walking slowly backward." BT has fought tooth and nail to hinder the unbundling of the local loop and the alternative carriers have accused the telecoms regulator,


, of allowing BT to ride roughshod over it. There is now even talk that several of the alternative carriers are preparing to sue BT and Oftel over the fiasco.

"Oftel could have been more forthright on this with BT; they are a bit on the late side," admits Robertson Stephens' Dixon.

Not any more. Stung by the recent criticism, Oftel announced this week that 361 of BT's local exchanges will open to alternative carriers. The carriers will install their own equipment on the exchanges to provide high-speed services to consumers in competition with BT. Oftel also said it intends to ensure that the unbundling of the local loop is carried out "fully and without discrimination."

Perhaps. BT has some 6,500 exchanges in the country -- although Robertson Stephens' Dixon explains that many of those are small "cabins" in remote areas -- and the former incumbent used the time it excluded the competition to test and roll out its own DSL infrastructure.

Lehman Brothers' Lamirel believes that alternative carriers will take "the lion's share of the DSL market in Europe." She expects DSL to take off in 2001 and reach 18% and 8% penetration of business and households, respectively, by 2004. This translates into a market worth some $7 billion by 2004.

Yet the alternative carriers and investors in these telcos face their own risks. For the carriers, there could be technological problems with DSL, changes in the regulatory environment that may favor the incumbents and problems with securing funding to build the infrastructure. The latter could sting these companies shares in the short term, as Energis found last week.

For investors, according to analysts, it is not whether one should invest in the sector, but in which companies within it. Currently, the alternative carriers are individually taking market share from the incumbents and mostly have avoided competing with each other. Inevitably competition will increase between them, resulting in losers and winners.

One thing that is for certain: Each of the alternative carriers will ask the market for more money. Whether they spend it wisely is another matter altogether.