George Pitcher: Third time unlucky for telecoms’ lost generation

Beleaguered telcoms foolishly let the banks persuade them to overpay for third-generation licences. Now they’ll have to pay for their optimism, says George Pitcher

There must be sound economic reasons for doing so – the Finnish are a canny and good-natured crowd as a rule – but I have to say that the decision by Helsinki-based telecoms company Sonera to hand back its Norwegian third-generation (3G) mobile-telephone licence for nothing smacks of petulance.

Anyone would think European telecoms operators had been forced to bid absurd, balance sheet-threatening amounts for the 3G licences being offered by national governments. Perhaps their finance directors lived in fear of the midnight knock, when merchant bankers acting for state-owned telecoms networks would bundle them into starkly lit basement rooms and keep them awake for days, until they were so disoriented they would bid anything for the licences.

In any event, Sonera bid just over £11m for its Norwegian licence and – now the heavies have disappeared, possibly to be arraigned before a tribunal in the Hague – it has decided to write off its investment. Perhaps, as part of its counselling programme for post-traumatic stress disorder, it has decided it is best to put the whole terrifying experience behind it and get on with its life.

Sonera claims that its decision is based entirely on the competitive situation in Norway, which may mean that telecoms operators shouldn’t have tried to develop 3G aspirations in markets in which they haven’t built a strong second-generation customer base. But whatever its motives for relinquishing its licence, Sonera can comfort itself that it got off relatively lightly. Close to £32.5bn was bid in total for 3G licences in Germany, by some of the biggest telecoms names around.

Germany is something of a black hole into which global telecoms investment has been sucked. It is, potentially, where the gravitational pull on money proved so infinitely intense that investment is being crushed into debt and nothing will be able to escape, not even light.

Deutsche Telekom lost 20 per cent of its stock-market value last week, after a share placing fuelled fears of an unmanageable share overhang and analysts downgraded their earnings forecasts. It wasn’t alone in suffering another miserable week: Vodafone lost 12 per cent of its value and France Telecom shares were down by 11 per cent.

Oh yes, and Sonera was down ten per cent, proving that you can’t spend £11m on nothing and hope to get away with it. It might be observed in passing that Sonera’s commitment to 3G licences amounts to £2.5bn – let’s hope Norway was its only problem.

The banks, of course, will adopt their normal position under these circumstances. Having poured your money, my money and the “old” economy’s money into the telecoms sector when it all seemed a jolly good idea, they will be turning distinctly wobbly and demanding your and my money back, just as the industry can least afford to return it in an economic downturn.

The lending banks – many of which, remarkably, will be the same houses that flogged 3G at such exorbitant rates on behalf of national governments – are feeling rather smug at the moment. The Bank of England warned them last week that corporate debt is higher than it was at the bottom of the last recession and that corporate borrowing could trigger cuts in corporate investment if profits failed to hold up. But the lending banks don’t seem too bothered.

They claim that their risk analysis has improved greatly since the recession of a decade ago and that, in a low interest-rate environment, they are well positioned to see industry through the hard times. Moreover, the ratio of debt to profit is also greatly improved, even over three years ago. Currently, just over 20 per cent of industry’s profits are absorbed by interest payments, against 30 per cent ten years ago.

But the Bank of England remains worried about the burden of debt carried by the most vulnerable sectors. And where are the debt-to-profits ratios likely to make companies most vulnerable? Step forward the telecoms sector.

It is in this inclement climate that the banks are likely to be asking for their umbrellas back from the telecoms operators, which are already indicating that they overpaid horribly for their 3G licences – ramped up, you will remember, by the banks. And I fear there is worse to come.

An awful truth may be that 3G isn’t all it was cracked up to be anyway. Or, rather, it would have been, had the operators got into the 3G technology quickly enough. Technological development in these markets doesn’t wait for telecoms companies and their banks.

It is mildly chilling that the Federal Trade Commission in the US is investigating claims that Microsoft has been coercing customers into revealing personal information, such as addresses and credit-card details, by registering with Passport, which authenticates Internet identities.

Microsoft doesn’t run telecoms networks. But if the telecoms operators and their banks dither obsessively over 3G, there can be little doubt that the computer community will bypass the technology and provide exciting and different alternatives. Having spent a fortune on their networks, the telecoms crowd could then be reduced to renting airtime to smarter computer manufacturers.

If that were to happen, 3G licences wouldn’t just be worthless – as Sonera has discovered – but obsolete.

George Pitcher is a partner of issues management consultancy Luther Pendragon

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