Telekom Austria Leads in $2.7 Billion Frequency Auction

Telekom Austria AG and local units of Hutchison Whampoa Ltd. and Deutsche Telekom AG tightened their hold on the Alpine republic’s mobile-phone market in a spectrum auction that raised 2 billion euros ($2.7 billion).

Telekom Austria bought half of the 28 available frequency blocks for 1.03 billion euros, the Rundfunk & Telekom Regulierungs broadcast and phone-industry overseer said yesterday. Deutsche Telekom’s T-Mobile unit spent 654 million euros on nine packages, and Hutchison’s Three division paid 330 million euros for the remaining five.

The price tag is “clearly above expectations,” said Bernd Maurer, a Vienna-based analyst at Raiffeisen Centrobank.

Telekom Austria fell the most in more than a year in Vienna trading. The auction, the biggest in Austria’s history, was delayed by a year after Hutchison agreed to buy mobile operator Orange Austria from Mid Europa Partners LLP in 2012. Three and larger operators Telekom Austria and T-Mobile are the only mobile-service providers in the country following the takeover. No other company took part in yesterday’s competition, in which the regulator was seeking a combined minimum of 526 million euros from all suitors.

Telekom Austria dropped as much as 8.8 percent, the steepest intraday decline since September 2012. It traded 4.9 percent lower at 5.97 euros as of 1:16 p.m. in Vienna. Deutsche Telekom fell 0.9 percent in Frankfurt while Hutchison rose 1.7 percent at the close in Hong Kong.

‘Gigantic Challenge’

For Telekom Austria, negative short-term effects, including higher debt and rising financing costs, will outweigh positive mid-term prospects for new business, Maurer said.

Six of the 28 frequency blocks offered are in the 800-megahertz spectrum, the main segment for larger-capacity long-term evolution technology, and Telekom Austria was allocated four. LTE networks enable expanded broadband Web access in rural areas while allowing urban customers to browse the Internet faster and stream higher-quality videos.

Operators are likely to “gorge on frequencies because the volume of data is growing so rapidly,” Telekom Austria Chief Executive Officer Hannes Ametsreiter, said at a conference on Oct. 8. “Videos are going to explode and this is posing a gigantic challenge to the networks.”

Telekom Austria “rolled the dice” on a gamble to corner the market, Usman Ghazi, a London-based analyst at Berenberg Bank, wrote in a note to clients. A breakeven on this investment in the long term “is not trivial,” he said.

New Debt

Telekom Austria will finance the acquisition, which has to be paid within eight weeks, with existing cash and new debt, the Vienna-based operator said in a statement. The company intends to reduce liabilities via “operational cash flow.”

A capital increase to pay for the auction can be ruled out, Ametsreiter told journalists in Vienna today. The company’s credit ratings -- Telekom Austria holds a BBB at Standard & Poor’s and a Baa1 at Moody’s -- are being discussed with the agencies, the CEO said.

“Digesting a billion euros is not a bagatelle,” Ametsreiter said.

The result of the auction is a “disaster for the industry” because of high pricing, Jan Trionow, head of Three Austria, said in a statement. “Compared to competitors, we managed to minimize the financial damage to the company.”

Auction Criticism

Trionow was among industry executives who had criticized the “combinatory clock auction” form of the competition because of the potential cost. Operators weren’t allowed to disclose whether they intended to take part, a prohibition intended to prevent collusion.

“It’s not the auctioneer who determines the result,” Georg Serentschy, who heads regulator RTR, said by telephone. “If the market leader seizes 50 percent of all spectrum, he shouldn’t expect others to just watch.”

Operators will lack the funds to build out their networks as a result of the high spectrum prices, Andreas Bierwirth, T-Mobile Austria’s CEO, said in a statement.

“The fees are at the top end” of what was taken in comparable European auctions, Bierwirth said. “The public broadband subsidies for underdeveloped regions that have been announced should be considerably raised.”

Quadrupled Usage

Hutchison completed its 1.3 billion-euro takeover of Orange Austria in January. The deal included the sale of Orange’s prepaid unit Yesss! to Telekom Austria for 390 million euros to meet antitrust requirements.

Data usage more than quadrupled in the past three years, the regulator said in its latest report on Austria’s telecommunications market. At that rate, the figure may double again by mid-2014, the regulator said. Smartphone ownership in Austria exceeds figures in neighboring countries at 69 percent of the population, compared to 43 percent in Switzerland and 29 percent in Germany, according to the Mobile Marketing Association.

The additional auction revenue comes as an unexpected boon to Austria’s state coffers in a year in which the government may have to spend more than budgeted to prop up nationalized Hypo Alpe-Adria-Bank International AG.

Austria’s Infrastructure Ministry pledged yesterday to invest half of the frequency-auction proceeds in bringing broadband Internet to remote areas and supporting information-technology research.

A sale of mobile frequencies for UMTS-technology phones in 2000 raised 11.4 billion Austrian shillings ($1.13 billion), causing disappointment among Austria’s politicians who thought it could have brought in twice that amount. German operators paid 50.5 billion euros that year, marking a high point in a series of auctions during the dot-com boom.

Telekom Austria sold 300 million euros in bonds after Chief Financial Officer Hans Tschuden said in May that gaining mobile spectrum at auction might lead to financing needs. It also sold a 600 million-euro hybrid bond earlier this year.

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