O2 halves the value of its UK 3G licence

The mobile operator admits that its third-generation licences are worth nearly £6bn less than it paid for them
Written by Graeme Wearden, Contributor

The UK's mobile phone industry took another body blow on Wednesday as mmO2 announced it had made a pre-tax loss of £10.2bn, and admitted that it paid well over the odds for its third-generation licences.

MmO2 has slashed the amount that it values its 3G licences, which cover Britain, Germany and the Netherlands, by £5.9bn. It now believes its UK 3G licence is worth just £2bn -- having paid just over £4bn for it in the 2000 auction.

The operator had already taken a financial hit of £1.4bn by selling off its Dutch operations for just £17m, and it has now also taken a charge of £2.4bn in goodwill -- which is the difference between what a company pays for another firm, and the actual value of that firm's assets. A goodwill writedown is usually an admission by a company that it paid too much when acquiring another firm.

In total, mmO2's various writedowns wiped £9.7bn off the value of its assets.

City traders have already welcomed this acknowledgement from mmO2 that some of its assets are worth less than previously thought, with its share price rising slightly. The company did also manage to double its core earnings compared to last year, achieving full-year earnings of £859m.

The move will raise further questions, though, about 3G's future as a commercially viable technology.

According to reports, mmO2 chief executive Peter Erskine blamed the 3G writedown partly on technical problems with third-generation handsets, which he said had made it harder to launch a service.

Analysts believe that there is only room for three successful 3G operators in the UK -- where five companies currently hold a 3G licence. This has led to speculation that two 3G operators could merge. Other experts have suggested that BT, which demerged mmO2 back in late 2001, could attempt to take over the firm again.

At the FT World Mobile Communications Conference in London this week, there was talk that Sky might buy up an ailing 3G operator.

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