Austrian telecoms auction squeezes smallest player

Reuters

* H3G emerges with no 800 MHz spectrum

* Result limits H3G's ability to compete in rural areas

* Telekom Austria stretched by 1 bln eur price tag

By Georgina Prodhan and Angelika Gruber

VIENNA, Oct 22 (Reuters) - Telekom Austria paid ahigh price for new spectrum in a fourth-generation telecomsauction that may pay off if it reduces a competitive threat fromsmaller rival Hutchison Whampoa's H3G.

The auction on Monday raised more than 2 billion euros ($2.7billion), far exceeding expectations and making it Europe's mostexpensive 4G telecoms auction per head of population in acountry of just 8.4 million.

The billion-euro price tag for Telekom Austria will stretchthe finances of the country's biggest operator, whose marketvalue was 2.8 billion euros at Monday's stock market close, andis likely to pressure its credit rating in the short term.

But it may be a price worth paying to protect TelekomAustria's fixed-line broadband customer base, especially inrural areas, which could have faced a more serious challengefrom H3G, the smallest of Austria's three telecom operators.

H3G emerged from the auction with no spectrum in thevaluable 800 megahertz range used for long-range communicationsand for penetrating the walls of buildings, effectively limitingits appeal to urban and suburban areas.

"It appears to us that Telekom Austria has rolled the diceon a 1.03 billion-euro gamble to corner the market for800-1800MHz spectrum in order to starve Hutchison (seen as theprice disruptor) of network capacity," Berenberg analysts wrote.

Telekom Austria joined the other operators on Tuesday incondemning the auction process, which drove up prices by forcingthe participants to bid blind to limit any possible collusion.

But it welcomed the result that gave it two-thirds of the800 MHz spectrum, saying it was now in an "unparalleled"position to roll out a 4G network nationwide.

"This ... allows Telekom Austria Group to protect itsfixed-line as well as its mobile customer base, in particular inrural areas," it said.

A rival 4G mobile network covering the countryside, withspeeds of at least five times those of current mobile networks,this could have tempted rural households to switch from thefixed-line broadband connections in which Telekom Austria has aneffective monopoly.

The market took a shorter-term view on Tuesday, sendingTelekom Austria shares down by as much as 8 percent.

Telekom Austria has said it will finance the spectrumpurchase through a combination of cash and new debt.

The company has ruled out any immediate capital increase butits need for financing may open the door for Mexican billionaireCarlos Slim to increase the 23 percent stake he holds via hisAmerica Movil Latin American telecoms group.

WEAKER POSITION

H3G plans to build out a nationwide 4G network on 1800 MHzspectrum, which is less effective in the countryside but whereit already has substantial infrastructure.

In total, H3G won 18 percent of the frequencies on offer fora price of 330 million euros, while T-Mobile Austria spent 654million euros on the other 32 percent.

Austria is Europe's most competitive mobile market, withall-inclusive pay-as-you-go packages starting from 7.50 eurosper month. H3G now has market share of 25 percent, TelekomAustria has 44 percent and Deutsche Telekom's T-Mobile Austria 31 percent.

"The reality is Hutchison is in a significantly weakercondition than it was before the auction," said AntonoisDrossos, co-founder of Finnish telecoms advisory firm Rewheel."Competition has weakened in Austria as a result."

H3G's Chief Executive Jan Trionow said the company had bidfor 800 MHz spectrum but in the end had not been prepared to paythe high prices that its rivals did.

"We came relatively strongly out of a bad situation," hetold Reuters. "We minimised the damage to our shareholders."

H3G had promised in its year-long battle to buy OrangeAustria that the 1.3 billion-euro deal completed at thebeginning of the year would increase, not cut, competition.

It had argued that by buying Orange, then the third-largestplayer in Austria, it would be in a stronger position to competewith the much larger Telekom Austria and T-Mobile Austria.

Conditions imposed on H3G in approving the takeover includedgiving up 800 MHz spectrum to be offered in the auction to a newentrant, and agreeing to sell network capacity wholesale cheaplyto enable new virtual carriers (MVNOs) to enter the market.

In the event, no new fourth player emerged at the auctionand the 800 MHz spectrum was sold to Telekom Austria andT-Mobile Austria, making H3G's potential network coverage lessattractive for an MVNO seeking to cover the entire country.

"The spectrum distribution has significantly reduced theviability of a potential new mass market mobile virtual networkoperator (MVNO)," Telekom Austria said.

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