3 to face further cash input

January 16, 2005

3 UK enjoyed a pretty good 2004 but questions remain whether it can convince investors to back its floatation plans. The Sunday Telegraph reported that the Hutchison Whampoa unit added 1 million customers in the run-up to the festive season and takes its UK subscribers to 2.5 million.

Hutchison has 6.8 million 3G subscribers globally said chief executive Canning Fok and the company is adding 30,000 new users daily. The group's Italian operation is also going to be floated in the future.

Analysts believe Hutchison is aiming for 3 Italy and 3 UK to each have a market value of more than £3 billion when they are floated on at the end of 2005 and in early 2006 respectively. But 3 needs to overcome some monumental challenges over the next 12 months to achieve the IPO valuations.

3's rapid subscriber growth is costing Hutchison a vast sum with investment in the business and networks in excess of £13 billion since its launched in 2003.

Enders Analysis, the telecoms research company, believes that Hutchison will have to spend a further 19 billion euros to get 3 in a cashflow break-even position - where the company is generating enough cash to be self-funding - by 2012.

James Barford, a mobile telecoms analyst at Enders Analysis, says, "We doubt the IPO will be successful. The most likely outcome in our view is that 3 continues on its current course through most of 2005 at least."

He continued to say that as customer turnover kicks in, a large amount of cash is needed to drive 3 UK and 3 Italy to a 15% to 20% market, where the company will likely preserve cash and become less aggressive in subscriber acquisition. "

"This is likely to condemn the operation to a slow death," he added.

However, Alan Hellawell at Lehman Brothers said, "We now expect [3 Group] to break even on EBITDA (post subscirber acquisition costs) in the third quarter of 2005. We believe this will strengthen market confidence further on Hutchison's 3G lead and dominance."

A problem Hutchison needs to solve is how to lower costs but keep growing market share. 3 is spending an average of 270 euros acquiring each customer, significantly higher than its rivals'. In the UK and Italy, the company is offering the cheapest voice tariffs and heavily subsidising its 3G handsets.

3 is likely to cut the commission it pays to third parties which allows retailers to offer cheaper tariffs and special offers on 3's network such as half price line rental and free handsets. But there are fears that when these deals expire customers will leave in droves.