UPDATE 2-Austrian telecoms auction squeezes smallest player

Tue Oct 22, 2013 12:33pm EDT

* 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 a high price for new spectrum in a fourth-generation telecoms auction that may pay off if it reduces a competitive threat from smaller rival Hutchison Whampoa's H3G.

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

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

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

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

"It appears to us that Telekom Austria has rolled the dice on a 1.03 billion-euro gamble to corner the market for 800-1800MHz spectrum in order to starve Hutchison (seen as the price disruptor) of network capacity," Berenberg analysts wrote.

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

But it welcomed the result that gave it two-thirds of the 800 MHz spectrum, saying it was now in an "unparalleled" position to roll out a 4G network nationwide.

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

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

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

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

The company has ruled out any immediate capital increase but its need for financing may open the door for Mexican billionaire Carlos Slim to increase the 23 percent stake he holds via his America Movil Latin American telecoms group.

WEAKER POSITION

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

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

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

"The reality is Hutchison is in a significantly weaker condition than it was before the auction," said Antonois Drossos, 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 bid for 800 MHz spectrum but in the end had not been prepared to pay the high prices that its rivals did.

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

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

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

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

In the event, no new fourth player emerged at the auction and the 800 MHz spectrum was sold to Telekom Austria and T-Mobile Austria, making H3G's potential network coverage less attractive for an MVNO seeking to cover the entire country.

"The spectrum distribution has significantly reduced the viability of a potential new mass market mobile virtual network operator (MVNO)," Telekom Austria said.