The money has been spent and the debts tallied. But a new mood is now taking hold, inspired by post-Enron Corp. scrutiny and unfolding telecom disasters such as Global Crossing Ltd. The companies that spent a combined $116 billion on European 3G licenses can no longer carry those assets on their books at full value because they're simply not worth it--and investors won't suspend disbelief anymore. "Goodwill [standards] are going to become a lot more stringent," says Darren Ward, telecom analyst with Credit Suisse First Boston in London. Dutch telco KPN (KPN
) confirms write-downs are in the offing but won't specify timing or amounts. Analysts expect others, including Vodafone (VOD
), to follow suit.
The numbers tell the story. Twenty-eight countries so far have awarded 3G licenses, and outside Britain, Germany, and Italy, the average license fee comes out to $65 per capita. However, in Brit-ain, Germany, and Italy, where prices went through the roof, carriers paid an average of $441 per capita for the right to offer 3G services. Based on the global average, the 12 bidders that spent $90 billion for licenses in the three countries overpaid by some $77 billion. Carriers "have tried pulling a rug over the hole in their book equity, but everyone knows it's there," says Rick Deutsch, head of credit research at BNP Paribas in London.
Cleaning up balance sheets won't reverse past mistakes, but it'll start the healing. Of course, near-term, writing down assets will wipe out gobs of equity. Vodafone alone would have to chop $14.2 billion from both sides of its balance sheet just to revalue its licenses in Germany, Italy, and Britain. But such a reduction would also boost the company's eventual return on assets and return on equity--and make 3G services look more profitable once they're launched.
The fly in the ointment is why the licenses have depreciated so much. "Operators are under pressure to acknowledge that future returns may not be as great as expected," says telecom analyst Farid Yunus of Yankee Group Research Inc. in London. By some reckonings, 3G services will produce less than $10 billion in incremental revenues for European carriers in 2005. Nice, but no gold mine. The question is how investors will react to an acknowledgment of that reality. By Andy Reinhardt in Paris, with bureau reports