* 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 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
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.
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.