Skip to main content

LONDON -- The increasingly acrimonious dispute between two of the participants in Holland's recent auction for third-generation mobile-phone licenses has taken a turn for the worse as


and British Telecom's


accused each other of lying, and the Dutch competition authorities raided the offices of both telcos on Friday.

Aside from the obvious unsightliness of two companies arguing in public, this spat could further damage a sector already seriously wounded by fears about high debt levels, further downgrades by rating agencies and refinancing problems. Already, national governments are investigating allegations of collusion between the operators, and there is the specter of the

European Commission

becoming involved and the awful possibility that some auctions may have to be held again.

On Thursday,


( BTY) shares closed down 28p, or 3.5%, at 762, Holland's


( KPN) fell 0.81 euros, or 3.6%, to 22.03 and


(VOD) - Get Vodafone Group Plc Report

finished 23.75p lower, or 8.6%, at 253.

Scroll to Continue

TheStreet Recommends

Vodafone's fall could also be attributed to the operator's house broker

UBS Warburg

cutting its 2001 profits forecasts, yet the reason the brokerage did so -- the analyst had to adjust the forecasts to take into account the amortization of the cost of the 3G licenses -- provides much of the explanation why shares of telcos like BT and Vodafone have fallen over 50% from their highs earlier this year.

Going, Going, Down

Over the next four years it is estimated the mobile operators will have to invest around $300 billion on the licenses and the building the infrastructure that will enable the telcos to offer their customers a whole new range of services over their phones.

Such a large amount of money, together with the uncertainty over whether making profits from the mobile Internet will be just as elusive as that on the PC Internet, has led to the rating agencies slashing the credit ratings of many of these operators, with the predictable result that the shares have fallen, and the spreads of their bonds over Treasuries widened dramatically.

Needless to say, the headlines that accompanied the $46 billion the German auction raised and the $35 billion in the U.K. auction hasn't helped sentiment, so there was an almost audible sigh of relief when the last major auction, that of Italy, finished last month.

Alas, the controversy surrounding the auctions meant they were never going to go away quickly.

He Said, She Said

The Dutch authorities are investigating a meeting that took place in July between VersaTel and Telfort, which would have been against the rules of the auction since they were rival bidders.

A spokeswoman for BT has confirmed to


that this meeting did take place, but that it was "to discuss a normal existing arrangement of fixed-line business."

"When Verstal raised the subject of the auction, Telfort broke off the meeting," the spokeswoman said. "We gave this information to the Dutch government."

Versatel agrees that the meeting was simply "to discuss the normal course of business," but disputes Telfort's account of how things went from there. Versatel claims that it was Telfort that brought up the subject of the auction when it asked Versatel why it was participating in the auction. In response, Versatel explained the strategic importance of 3G to its business.

Denying any wrong doing on its part, Versatel puts the onus on its rival: "According to the rules of the auction, if Telfort had felt that this was an invitation to conspiracy then Telfort should have gone immediately to the auction regulators or the government."

"Telfort's current stance towards this conversation is not credible as they have not previously referred to this conversation, nor towards the government." That sounds pretty logical, but, of course, Versatel has its own ax to grind, since it has lodged a formal complaint against Telfort, claiming it was bullied out of the auction.

What actually happened during the meeting will likely be difficult to determine, but with all the finger-pointing going on, the Dutch government may decide it has enough reason to pull Telfort's license and re-hold the auction. And that could easily work to the detriment to all other bidders, as they would most assuredly have to fork out more for 3G licenses that had been relative bargains.

This latest turn of events follows the unseemly end to the Italian auction, which ended abruptly after only two days when the hapless BT fell out with its partners in the


consortium and pulled out of the auction. With only $10 billion raised from the auction, the Italian government was understandably annoyed and has accused BT and others of colluding to bring down the cost of the licenses. As a first step, the government has frozen the $1.8 billion deposit that the consortium Blu placed before the auction.

More worrying is the prospect of the European Commission getting involved. A spokesman for the EC told


that it is "following the matter closely" and although it sees no need at present to infringe on the jurisdiction of the national regulators, "it will step in if the situation warrants it."

Jonathan Dann, an analyst for


in London, doesn't see "an

EU-wide investigation really going anywhere, but just the possibility auctions could be re-run can't be a good thing" for these shares.

"The uncertainty is ugly," Dann says.

Amit Khandwala, a fund manager at

Wright Investors' Services

who is long

Hutchison Whampoa


-- a major bidder in the auctions -- agrees that holding some of the auctions again would not be good for the shares. Yet although "sentiment for the sector as a whole is weak," he nevertheless believes that the sentiment surrounding the European mobile telcos is better than that for the U.S. telcos.

Perhaps, but with Austria's 3G auction beginning Friday, the industry can ill afford any more controversy.