Hutchison May Pay ‘Survival’ Premium in U.K. Spectrum Sale

Britain’s sale of mobile-phone frequencies, potentially raising 2.6 billion pounds ($4.3 billion), may force Hutchison Whampoa Ltd. (13) to pay a “survival premium” as competition among the four operators intensifies.

Vodafone Group Plc (VOD), Telefonica SA’s (TEF) O2 unit, Everything Everywhere and Hutchison are waiting to hear how frequencies needed for fourth-generation networks will be sold. Regulator Ofcom will this week set out rules for the 2012 auction and start talks. Hutchison’s 3 unit, the smallest of the four, said it may be forced out if it fails to win enough spectrum.

The auction will sell frequencies equivalent to three- quarters of the spectrum currently being used by operators. Carriers need the bandwidth to cope with data demand as users watch films and surf the Web on smartphones including Apple Inc.’s iPhone and handsets using Google Inc.’s Android system.

“It’s going to define the industry landscape for a generation, we absolutely know that,” said Hyacinth Nwana, a partner for spectrum policy at Ofcom.

The number of operators fell to four from five after France Telecom SA (FTE) and Deutsche Telekom AG (DTE) merged their British units to form the largest company, Everything Everywhere, ahead of O2 and Vodafone. The market may consolidate further without intervention in the auction from the regulator, 3 said.

Ofcom, which said it will consider the market environment ahead of the sale, must choose whether to support competition among the operators or “gamble with consolidation,” Kevin Russell, 3’s chief executive officer, said at an industry conference on March 15.

Spectrum Needs

Hutchison Whampoa rose as much as 3.1 percent in Hong Kong, and traded 2.8 percent higher at 87.20 HK$ ($11.18) at 2:46 p.m.

Hutchison entered the U.K. market in 2000 when the government sold third-generation licenses. The five operators spent a total of 22.5 billion pounds acquiring licenses at the time. Hutchison began offering services in 2003 and invested more than $12 billion in spectrum and the network.

All the companies are seeking access to the valuable 800 megahertz band of low spectrum that can travel long distances with fewer expensive base stations.

“You will ultimately need a lot of spectrum to have a sustainable market share,” Russell said. Hutchison’s 3 may need to win 30 percent to 40 percent of all frequencies available in the auction to reach its target for market share of more than 15 percent, he said.

3 is demanding a reserved slot in the 800 megahertz band to prevent it being squeezed out in the bidding. Alongside Everything Everywhere, it is also seeking a cap on bids for the low frequencies, a view opposed by the other operators.

Government Limits

The U.K. government in July lifted a cap on how much of the most-coveted frequencies O2 and Vodafone could buy. While Ofcom may still impose limits, the proposals would enable the two operators to pull ahead of rivals as they develop faster networks.

“We do expect them to impose a sub-1 gigahertz cap,” Nicolas Ott, head of regulation and strategy at Everything Everywhere, said in an interview. “If it’s not there it will be very surprising.”

Vodafone and Telefonica are the only U.K. companies to hold low-frequency 900 megahertz airwaves. Orange and T-Mobile hold five times as much of the 1.8 gigahertz band than the other two operators combined.

“We’re rather skeptical of arguments to skew spectrum in favor of one operator or another,” said David Rodman, head of regulatory affairs at Vodafone U.K. at a conference in London this month. Hutchison’s 3 may need to pay a “survival premium,” he said.

Auction Delayed

The U.K. auction has been delayed for more than two years as the regulator faced legal challenges. Under the current timetable, bidding will take place in the first quarter of 2012, with spectrum starting to become available for use from 2013.

The U.K. auction will follow the sale of low frequencies in Sweden and Germany, designed to enable operators to roll out fourth-generation networks. The German auction last year raised 4.38 billion euros ($6.2 billion) from the disposal of airwaves previously used to broadcast television services.

Based on the amounts spent in Sweden and Germany, the 800 megahertz band may be sold for between 1.4 billion pounds and 2.4 billion pounds in the U.K., according to Analysys Mason, a research firm in Cambridge, U.K. The sale of 2.6 gigahertz frequencies may be valued at about 225 million pounds, according to bidding in Germany.

Operators may bid a “strategic premium” to force 3 to exit the market, Stephen Lerner, director of regulatory affairs for 3, said in an interview. “The greatest boost to the profitability of Vodafone, O2 and Everything Everywhere would come from 3 being pushed out of the market.”

Constraints

Ofcom’s decision in January to free up existing spectrum for the three other operators for faster data services has altered the market in the runup to the auction, by giving them additional frequencies, 3 said. The company doesn’t have any spectrum on a second-generation network.

The U.K., once at the forefront in Europe in offering faster wireless networks, has been constrained by trying to ensure competition amongst the operators, said Chi Onwurah, the Labour spokeswoman for business, who also helped to roll out a mobile-phone network in Nigeria for operator MTN.

“Trying to maintain competition is one of the reasons why Ofcom has had so few auctions,” she said.

To contact the reporter on this story: Jonathan Browning in London jbrowning9@bloomberg.net.

To contact the editor responsible for this story: Simon Thiel in London at sthiel1@bloomberg.net

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