DUBLIN, Ireland-The massive sums being invested in third-generation (3G) licenses, network development and acquisitions have placed the major European operators firmly under the financial spotlight. While observers agree there is no significant cause for concern yet, it is also clear operators are being forced to explore new avenues to secure the money they need.
The level of investment committed within the European mobile industry has gone way beyond the expectations of most analysts. The total spent on the five 3G licenses recently auctioned by the U.K. government, for example, worked out at approximately 387 (US$582) for each member of the country’s population.
Operators have explored various avenues to raise new financing or reduce expenditures, with the most interesting coming from Vodafone AirTouch. The carrier allegedly formulated a complex tax avoidance plan that was thought to involve holding the recently acquired German telecom group Mannesmann in an offshore tax haven rather than as a direct subsidiary to avoid tax payments.
An offshore holding company can be used to move debt into an acquired company in a high-tax country, which can then reduce its tax bill on profits generated in its home country because the “loan” from the holding company would generate tax-deductible interest payments. Because the interest payments from the acquired company to the offshore holding company do not enter the purchasing company’s country, they do not attract tax in that country either.
By holding Mannesmann-for which it paid more than 100 billion (US$150.3 billion)-in an offshore tax haven, Vodafone Air- Touch could reduce its annual tax bill by as much as 500 million (US$751.6 million). Unfortunately, none of the parties involved were willing to comment on whether the move will materialize.
Vodafone AirTouch has also decided to float a significant percentage of Italian telecommunications company Infostrada, which could generate up to 4.5 billion (US$6.8 billion), despite suggestions that the Italian company could be an integral part of its strategy following the acquisition of Mannesmann. The decision to go to the bourses with Infostrada is an indication that Vodafone AirTouch has had to spend more than it planned on 3G licenses.
Vodafone AirTouch is not the only company going to the markets. In March, France Telecom launched the biggest-ever bond sale by a French corporate borrower when it announced plans to issue bonds worth 4 billion euros (US$3.7 billion). The funds were earmarked to finance the US$3.88 billion cash deal that saw France Telecom take control of Global One, its former joint venture with Deutsche Telekom and Sprint. Yet even that deal was dwarfed by the US$5.25 billion corporate bond sale issued by Vodafone AirTouch in February.
France Telecom also announced plans to sell 130 billion French francs (US$18.6 billion) of assets in Sprint and Deutsche Telekom to finance the round of acquisitions that included a 28.5-percent stake in Germany’s Mobilcom and ended with the acquisition of U.K. wireless operator Orange for 50 billion euros (US$46.8 billion).
While these deals will see France Telecom’s debt gearing-debts versus assets-reach 120 percent by the end of this year, the company’s chief financial officer described the debt increase as “bridge financing.” And financial analysts said the gearing is expected to fall below 60 percent by the end of 2001.
The latest Moody’s Investor Service report painted a less optimistic picture, saying the high cost of 3G licenses could lead to significant pressure on the credit ratings of several European mobile communications companies.
However, industry analysts concur with France Telecom’s more relaxed view. According to The Yankee Group analyst Phil Taylor, based in the United Kingdom, any financial market concerns have receded as analysts consider the scale of some telecom operators. “The markets are usually skeptical of revenue forecasts, but they are reassured to see how costs can be spread across a number of different markets,” Taylor said.
The newly acquired Orange is a good example. The combined company now has more than 21 million subscribers, and that figure will rise to around 30 million by the end of the year, according to Graham Howe, financial director. New Orange aims to become Europe’s largest mobile operator by 2002 through further acquisitions, which will be funded by a stock market flotation later this year.
In June, BT Worldwide President and Chief Executive Alfred Mockett told the Fortune Global Forum on E-commerce conference attendees that the cost of European Universal Mobile Telecommunications System (UMTS) licenses would encourage operators to form commercial alliances to share expansion and infrastructure costs.
Eddie Murphy of U.K. telecom consultancy Analysys remains sanguine. “Mobile networks are used to structuring major investments, and there is certainly no concern in the financial markets,” he said.
However, he also suggested that multiple license bids could change that situation and feels it would be dangerous to underestimate the importance of a good credit rating. “A lower credit rating ultimately makes it more expensive to acquire money,” Murphy added.
