January 24, 2019 / 12:44 PM / 5 months ago

United Internet's 1&1 Drillisch to take part in German 5G auction

FRANKFURT (Reuters) - United Internet’s mobile unit 1&1 Drillisch said on Thursday it would apply to take part in Germany’s auction of 5G licenses, opening the way for it to become the country’s fourth network operator.

A 5G sign is seen at the Mobile World Congress in Barcelona, Spain February 28, 2018. REUTERS/Yves Herman

The gambit by Ralph Dommermuth, the billionaire CEO of both firms, threatens to shake up a cosy oligopoly that has left Europe’s largest economy lagging on connectivity just as the United States, China and South Korea forge ahead on 5G.

“Now we want to lay the foundation, as a fourth mobile network operator, to contribute to Germany becoming a leading 5G market,” Dommermuth said after winning boardroom backing for the move.

Drillisch, in which United Internet owns a 73 percent stake, said it had lined up 2.8 billion euros ($3.18 billion) in financing from a European banking consortium to back its bid, in addition to its own sources of funding.

Yet its shares fell by 6.9 percent on concerns that it would give up its profitable business as a ‘virtual’ mobile network operator and incur heavy outlays to secure a license and build network infrastructure.

Drillisch’s stock has fallen by half over recent months on concerns that the costs of a 5G operatorship might prove prohibitive.

The value of Dommermuth’s direct 40 percent stake in United Internet has slid too and is now worth around $3.4 billion.

Sources and analysts say 1&1 might opt to lease rather than invest in building its own network to keep capital costs under control. Analysts at Jefferies also speculate that Drillisch may in fact use the 5G auction to extract better wholesale terms for its existing business.

HIGH-SPEED NETWORKS

Fifth-generation networks offer data speeds up to 100 times faster than existing 4G LTE networks, as well as ultra-low reaction times. The technology can support networked factories or self-driving cars.

Unlike the existing operators - Deutsche Telekom, Vodafone and Telefonica Deutschland - Drillisch is required to file a detailed submission by a deadline on Friday that details its financing for 5G and which vendors it would work with.

Industry sources say Drillisch is in talks with China’s ZTE and Nokia of Finland as vendor partners for its network.

Another concern has been that Drillisch, should it become an operator, would lose its guaranteed access to 30 percent of Telefonica Deutschland’s network capacity - a condition set by European Union regulators to allow the 2014 merger that created Germany’s No.3 mobile operator.

A source close to Drillisch said the agreement with Telefonica foresaw a transition period concerning the use of network capacity, as well as the possibility of switching to a national roaming arrangement as an operator.

Telefonica, for its part, does not see national roaming - or providing services where a partner lacks network coverage - as a viable proposition in the initial stages of 5G, according to a source familiar with its thinking.

This is because the spectrum being auctioned - of 2 and 3.8 Gigahertz - is made up of so-called ‘capacity’ frequencies that work best in cities or industrial estates and lack the range to provide nationwide coverage.

Reporting by Douglas Busvine; editing by Emelia Sithole-Matarise and Alexandra Hudson

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