Bloomberg News

Italy $3.5 Billion Spectrum Sale at Risk in ‘Wild West’ Spat

June 14, 2011

(Updates with regulator comment, Telecom Italia shares starting in ninth paragraph.)

June 14 (Bloomberg) -- Italy, trying to cut its deficit, may be thwarted in a bid to raise 2.4 billion euros ($3.5 billion) by auctioning frequencies, as broadcasters and phone companies resist the “chaotic” sale.

Local television channels, who occupy most of the frequencies to be sold, say they may refuse to free the spectrum if the government doesn’t offer higher compensation. Mobile- phone operators, the likely buyers, say the frequencies aren’t worth the price if the broadcasters don’t allow immediate access.

The Italian auction has been handled in “a quite chaotic way,” Tommaso Valletti, a professor of economics at London’s Imperial College, said in an interview. “There’s been a bit of the ‘Wild West’ in the Italian frequency sector. It won’t be easy to disentangle.”

The broadcasters’ resistance may hamper the country’s deficit-cutting plans and expansion ambitions of mobile-phone operators. Italy, whose credit-rating outlook was lowered on May 21 to negative from stable by Standard & Poor’s, included the expected auction proceeds in its 2011 budget. Operators such as Telecom Italia SpA and Vodafone Group Plc need bandwidth to meet surging data demand as clients use smartphones to watch films and surf the Web.

The broadcasters have been allocated 10 percent of the proceeds as compensation for freeing spectrum, according to government plans.

Demanding More Money

The compensation the government is offering local TV networks “isn’t fair,” said Filippo Rebecchini, chairman of Italy’s Radio Television Association. The government would need to double its offer to potentially convince the more-than 100 broadcasters his group represents to vacate their frequencies, he said.

Without an accord, the frequencies won’t be free in time for the auction, Rebecchini said. “First they should free up the spectrum, then sell it,” he said. “You can get a lot more for a vacant house than for one with a tenant.”

A government official declined to comment on whether authorities may change the design and procedure of the auction.

The mobile-broadband frequencies auction “can’t be postponed,” communications regulator head Corrado Calabro said in a speech in Rome today. A delay of the auction would lead to a “dead end,” as the mobile network risks congestion due to “exponential traffic growth,” he said.

More Competition

Calabro also urged the government to increase compensation to local broadcasters to free the spectrum ahead of the sale. The auction may raise more than the targeted 2.4 billion euros “under certain conditions,” he said, without elaborating.

The dispute comes as operators are seeking access to the valuable 800 megahertz band that can travel long distances with fewer expensive base stations. The frequencies can also be used for faster fourth-generation wireless services based on so- called long-term evolution technology, or LTE.

Phone operators aren’t prepared to pay high prices for frequencies if access isn’t guaranteed, Telecom Italia Chairman Franco Bernabe said at a hearing in parliament in April. Uncertainties “may make it difficult for the government to raise the 2.4 billion euros,” he said.

Prices will have to come down if the access issue isn’t resolved, Vodafone Italia Chief Executive Officer Paolo Bertoluzzo said at a separate hearing the same month. The value of the frequencies “is lower if they aren’t free,” he said.

Auction Delays

Telecom Italia rose 0.8 percent to 94.95 cents as of 11:38 a.m. in Milan, giving it a market value of 17.8 billion euros. The stock has dropped 1.8 percent this year.

Italy is not the only European country struggling to make new frequencies available.

A spectrum auction in the U.K. has been delayed for more than two years amid legal challenges, as Vodafone and Telefonica SA’s O2 unit opposed restrictions on the amount of low-frequency spectrum they could bid for. The frequencies set to go on sale in the first quarter of 2012 may raise as much as 2.6 billion pounds ($4.3 billion).

Spectrum sales are also scheduled in France, Spain and Switzerland this year.

The Italian government “wants the money first, and that’s the big issue between the telecom operators and the government,” Enzo Savarese, commissioner of Italian communications regulator Agcom, said in an interview, adding that he expects the auction process to begin in September. “The operator would like to have the frequencies at the same time or at least pay in installments.”

The auction will take place by the end of September, Industry Minister Paolo Romani said today in Rome.

‘Diminished’ Prospects

Standard & Poor’s cited slowing economic growth and “diminished” prospects for reducing government debt that reached almost 120 percent of gross domestic product last year when it lowered Italy’s credit outlook in May. Italy’s Treasury said after the rating report that it will “intensify” structural changes to the economy and push ahead with measures following a budget deficit of 4.6 percent of GDP last year.

Prime Minister Silvio Berlusconi said June 9 that he plans an additional 3 billion euros in deficit-reduction measures this year to meet a goal of reducing Italy’s shortfall to 4 percent of gross domestic product.

Italy’s 0.1 percent growth in the first quarter lagged behind the euro region as a whole and its two biggest economies. The German economy expanded 1.5 percent and French GDP grew 1 percent, while the 17-member region’s economy expanded 0.8 percent.

“The government has already included these proceeds in the 2011 to 2013 budget law,” said Chiara Corsa, an economist at UniCredit Bank in Milan. “Failing to raise these funds would certainly force the government to find the money elsewhere.”

--With assistance from Lorenzo Totaro in Rome, Jonathan Browning in London and Cornelius Rahn in Frankfurt. Editors: Jerrold Colten, Jim Silver

To contact the reporters on this story: Chiara Remondini in Milan at cremondini@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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