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MobilCom Checks Into 3G's ER

Light Reading
LR Mobile News Analysis
Light Reading
8/29/2002

MobilCom AG is the latest German UMTS license holder to question the value of its 3G spectrum permit, for which it paid DM16.37 billion (US$7.6 billion at the time) in August 2000.

Although it did not write down the value of the license in its latest financial report (see MobilCom to Restructure), the damage is to be announced in the third quarter -- if the company lasts that long.

Blood has already been shed by a couple of MobilCom's fellow German 3G license holders (see German 3G Player Folds and KPN Bites the 3G Bullet).

Equity analysts say a 3G license writedown of much more than €3 billion (about $2.95 million today) -- if done now -- would take MobilCom into negative equity. But unless France Telecom SA comes to its rescue next month, MobilCom will not be around to announce the details.

The new management said it "has succeeded in averting financial crisis for the time being." The time being in this instance is until September 30, when a €4.7 billion loan is due to be paid. France Telecom, which has a 28.3 percent stake in MobilCom, could yet step into the breach (see MobilCom: The Blade Bounces). It has signed a memorandum of understanding (MOU) with the lending banks (a deal MobilCom, apparently, has not seen), and is said to be cutting a deal with MobilCom's equipment vendors, Nokia Corp. (NYSE: NOK) and Ericsson AB (Nasdaq: ERICY).

Though analysts expect France Telecom to act, it's by no means certain.

One major problem is the mobile operator's former CEO, Gerhard Schmidt, and his wife, Sybille Schmidt-Sindram (Unstrung has always said that keeping things in the family is never a good idea). Between them they own 49.89 percent of MobilCom, and they want France Telecom to buy them out at €22 a share, though the stock is currently worth about €6. MobilCom's new management is suing Schmidt-Sindram's company Millenium GmbH over some MobilCom share deals (see MobilCom Sues Millenium). The fur is set to fly at an upcoming emergency general meeting, though a date has not yet been announced.

The latest financials, meanwhile, tell a pretty sad tale. Analysts agree that MobilCom would go bust without France Telecom's help. In the second quarter MobilCom recorded a net loss of €172.8 million on revenues of €519 million. The company has total assets of €11 billion, of which just over €9 billion is listed as "intangible." That sounds like UMTS license territory. Its total liabilities total €7.9 billion, and it had just €96 million in cash at the end of June. Its cash flow in the first six months of 2002 was negative, to the tune of €14.9 million, and if it had not drawn down vendor finance of €270.4 million, and a loan from France Telecom of €290.6 million, it would likely already be in the 3G morgue.

Clearly, this is a company with the UMTS blues. "It is becoming increasingly evident that the conditions for a commercially successful start will be difficult to fulfill," is its glum assessment. Some of this doom and gloom is the fault of the handset suppliers, according to MobilCom: "There is still a lack of really convincing, efficient, low-cost handsets."

That's not all. "The demand for mobile data services is still lagging well behind expectations. It is evident that cellular multimedia is not going to develop quickly into a booming mass market, as initially expected." Doctor, a sedative please!

This doesn't mean that MobilCom has thrown in the towel, though, and despite not owning any of its own sites (it's opted for rentals for 3G and a roaming agreement with E-Plus Mobilfunk GmbH for GSM coverage), it is "well on the way" to covering 25 percent of the German population by the end of 2003, as required by its 3G license. It has rented 3,600 sites for the rollout, of which 900 are fully equipped, while a further 1,800 have the housing and electrics completed. MobilCom did not indicate how much it would cost to complete its first-stage rollout.

Not owning its sites could be to the disadvantage of MobilCom, according to a London analyst, as it lessens the chance that the firm could strike an infrastructure-sharing deal à la T-Mobile and mmO2 plc (see Billions Hang on EC Judgment). However, analysts also point out that MobilCom has rather more pressing issues. Such as survival.

MobilCom had 4.9 million mobile customers at the end of its second quarter, which compares with more than 20 million for each of the market leaders, T-Mobile and D2 Vodafone. Its second-quarter mobile revenue was €368.4 million, and its average revenue per user (ARPU) is €25. The carrier claims that 68.2 percent of its customers are of the higher revenue-yielding post-paid variety, while the market average is about 46 percent. The company takes the line that it is not customer base size that matters, but "winning and retaining attractive customers at a reasonable cost."

— Ouida Taaffe, special to Unstrung
http://www.unstrung.com

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