Swiss Missed: Country Postpones 3G Auction, BT Scales Back European Sights

British Telecom abandons local 3G plans as the haves and have-nots of pan-European coverage grow more apparent.
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BERLIN -- Apparently European third-generation wireless auctions can't end without somebody close to tears.

Earlier this year, the U.K. and Germany auction costs soared into the billions, bringing the telecom operators to tears. In Italy and the Netherlands, governments became misty-eyed after their 3G contests ended sooner than expected, leaving public coffers short of some much-coveted telco lucre. On Monday it was Switzerland's turn for some UMTS (Universal Mobile Telecommunications System) ugliness.

The Swiss, on the heels of merger news, postponed its auction. Danish operator

Tele Danmark

(TLD)

said it would acquire and combine Swiss telcos

Sunrise Communications

and

diAx

in deals worth $2 billion. With only four remaining bidders for four licenses, Swiss authorities pulled the plug on the auction moments before it was scheduled to begin.

While the Swiss have yet to decide whether they will proceed with the auction at a later date, the whole episode highlights the widening gap between telcos setting up pan-European operations and those that aren't. Key for the Sunrise-diAx deal,

British Telecom

(BTY)

will sell its 34.4% stake in Sunrise to Tele Danmark for $659 million, ending BT's foray into Switzerland and underscoring the company's second-tier status as a European mobile operator. Alternatively, those still in the hunt for a Swiss license, such as

Vodafone

(VOD) - Get Report

, may now add another piece to the UMTS puzzle at bargain-basement prices.

British Telecom's 3G strategy has been in disarray since it failed to garner an Italian UMTS license last month amid a dispute with its

Blu

consortium partners. While that confusion ended the firm's chances of building a solid pan-European footprint, few observers thought it would herald BT's intention to leave almost everything past the English Channel to its Continental competitors.

To be sure, BT will remain active in Germany, potentially the region's largest market, through its

Viag Interkom

unit. But unloading Sunrise is likely the nail in the coffin for the company's UMTS aspirations. British Telecom tried to paint the sale as "the right deal at the right time" and as part of a dramatic restructuring it announced last week to sell off noncore assets in order to help pay down its crushing debt load. However, the money from Sunrise will hardly dent BT's $43 billion debt, though it certainly eases the way for Vodafone,

France Telecom

(FTE)

and

Telefonica

(TEF) - Get Report

to become the leading Europe-wide operators.

"There are those who are well on their way to developing a pan-European footprint and there are those where that possibility is already ruled out," says John Tysoe, an analyst for

WestLB Panmure

in London.

Just last week Vodafone bought a 25% stake in

Swisscom's

(SCM) - Get Report

mobile unit for $2.6 billion, plugging one of the few gaps in its European coverage, and France Telecom upped its stake in the Swiss unit of its

Orange

wireless division.

Unless the Swiss authorities find a way to revive the auction or another bidder decides to enter the fray, all four remaining bidders could end up with a license for the minimum $28.5 million, which could be a relief to shareholders and operators alike despite the relatively small size of the market.

"There's been some talk that

Deutsche Telekom

(DT) - Get Report

might come back in, but if it was so important to them why did they drop out earlier?" asks Tysoe. The Italian fiasco, the tepid Austrian UMTS auction and the latest developments in Switzerland show "the buyers have got license fatigue -- they haven't got any more money." (WestLB Panmure has an investment banking relationship with Deutsche Telekom.)

Some telcos still appear to have some fight in them, but BT has admitted it's tired. After all is said and done, Italy may be where British Telecom lost the UMTS war, but Switzerland will likely be seen as where it finally conceded defeat.