Lawyers hanging on

Telecoms specialist law firms are battling in a crowded field as stocks fall because of the cost of 3g licences and the impact of dot-com companies crashing.

Lucy hickman reports

The past year has seen 250 billion wiped off the share price of six FTSE 100 telecoms companies: BT, Cable & Wireless, COLT, Energis, Telewest and Vodafone.

BT alone has mounted up debts of 30 billion, and seen its share prices plummet from around 15 eight months ago to about 4.80 now.

The impact on the legal world was visible in recent sightings of BT lawyers scouring the City for jobs, in a sector where security of tenure is dissipating (see [2001] Gazette, 26 April, 8).

Denton Wilde Sapte telecoms finance partner Chris Fanner predicts the slump in the telecoms market will get worse before it gets better.

It is hitting mergers and acquisitions, and financing legal work in the sector.Mr Fanner says banks are being warned by regulators not to invest in telecoms - a sector, he says, hit hard by the expensive licenses for third generation (3G) mobile phone technology and last year's dot-com crash.

He says: 'Although the telecoms sector is distinct from the Internet, it is near enough removed to be burnt by what happened to Internet companies last year.

The telecoms market is more mature, and banks were more willing to lend to telecoms projects, but sentiment has turned against the sector on the back of the 3G licences and the dot-com crash.

It just shows how vicious a backlash can be.' He says there is a lot of uncertainty at the moment, adding: 'People are tending not to invest, so the deal flow is nowhere near what it should be.

There should be a lot of activity in the telecoms market now, but the sector has fallen off the cliff - banks and financiers are very wary at the moment, especially since a couple of big banks have already been badly affected.' However, there may be a silver lining.

Mr Fanner says: 'Perhaps the situation in the telecoms market will lead to more restructuring - because these companies will have to change their plans.

This will mean more work for lawyers, but then it is a rare thing for lawyers not to profit as long as things keep changing.'Chris Watson, a telecoms partner at Allen & Overy, says: 'I am still incredibly busy, and I am doing more large deals at the moment than I have in my life.

The nature has shifted, though.

There are a few companies restructuring and we're giving a fair amount of advice on potential insolvency.

This is a predictable shift given that one or two have got into difficulty.' He explains that this change of focus has come about in the past six months: 'Before, there was much more network roll-out and people desperate to get into the market.

Now people are consolidating.

It still means legal work, just of a different type.' Mr Watson agrees that the telecoms slump has hit lawyers in the sector.

'Before, there was more demand for lawyers than lawyers to meet demand.

I think demand will now possibly be outstripped by supply.

People who were telecoms lawyers will start calling themselves something else.' He adds that the slump has inevitably led to budgets being pruned - including legal budgets - forcing some in-house telecoms lawyers to seek work elsewhere.Daniel Preiskel, partner and head of telecoms at the London office of US/UK firm Steptoe & Johnson Rakisons, says that last year it was difficult to recruit sufficient qualified telecoms lawyers, but that situation has now reversed.

'Because there is less telecoms work around we're seeing a lot of good CVs on the market, which is sad,' he says.

Freshfields Bruckhaus Deringer's co-head of telecoms, Simon Marchant, says: 'A lot of law firms who tapped into the dot-com start-up work are probably finding they have less work at the moment.' Mr Preiskel warns that telecoms lawyers must now be more cautious about taking on clients.

'One has got to be very much aware of the market.

It's a very volatile market.

It may be a client will be bought out by another operator, then you lose the relationship, or you could lose money when you do an awful lot of work for a client, and they go into administration.

What might be a fantastic client one year could be in administration the next year.' He says much of last year's telecoms boom was hype promulgated by the investment bankers, who valued companies on their revenue and not their profits.

Internet service providers' share prices, he says, were likewise valued on their customer count.

'Revenue was the buzz word.

Doing your own infrastructure was seen as key, but companies needed large amounts of capital to do this.

The bankers were saying "don't worry about it, we'll lend you as much as you need".

Then there was a huge sea change.' Mr Preiskel - himself a former investment banker - adds: 'The sector received three knocks on the trot.

The lastminute.com share value tumble was the first indication of a ripple, then the same happened to World Online, and then the high 3G licence costs.

Operators had been promised there would be cash to fund capital expansion, then the cash dried up.' Mr Marchant, who acted for Mannesmann on the 80 billion hostile takeover bid by Vodafone, says the current climate is merely a correction of an over-reaction among investors in 1999/2000.

'Around the end of 1999, there was huge enthusiasm about mobile telephony and the related dot-com bubble.

The stock market was roaring away; then, when lastminute.com came to the market, the market wobbled.

When the stock market crashed around the middle of last year people became more cautious.

The threat of recession in the US and global economic concerns also weigh on people's minds.'Most of the lawyers questioned maintain that 3G technology - which will allow mobile phones to communicate at speeds of up to 2MB/second, giving them true multimedia capabilities - will be made to work, even though it is commonly accepted that licences were overpriced.Mr Fanner, who mainly deals with bank financing, says: 'The trouble with 3G is that it's bloody expensive and totally untested.

Eight years ago people were wary of investing 500 million in 2G technology.

Now they are being asked for ten times that amount for unproven technology in an unproven market.' He says the EU deadline of early next year for member states to be operating 3G technology will not be met by the embattled 3G licensees - who each forked out 2.5 billion for the licenses alone in the UK auction, and will have to pay out at least that much again to get the 3G networks up and running.

Failure to meet the deadline will mean penalties for the licensees but Mr Fanner predicts these are unlikely to be enforced.

'What would be the point of fining them? It is probably not their fault, it's driven by markets and by the greed of the governments who issued the licences - particularly in Germany and the UK.

'The UK government says it let the market dictate the price by holding an auction, but there is now talk about the government having to waive the instalments on the licences, otherwise the networks won't be established.' Mr Marchant says the industry is eagerly awaiting the outcome of the debate in Germany, where regulators are deciding whether it would be anti-competitive to allow 3G licensees to collaborate in owning networks to share costs.

'Everybody is worried about the cost.

The result of this debate could impact on other licence-holders.

The EU is encouraging national authorities to assist companies to deal with the problems of high costs; if Germany was to follow that lead it would be helpful to the overall climate and to companies struggling with large debts.' Mr Preiskel predicts that many 3G licensees will manipulate the market to ensure the new technology is a success.

'There is always a danger when you spend money on new technology that existing technology will expand at such a rate that it is almost up there with you.

However, because most 3G operators are also 2G operators, they can artificially suppress 2G advancement, and really push people onto 3G unless consumers are protected by [the sector's regulatory body] Oftel [The Office of Telecommunications].' However, confidence in Oftel is not high among telecoms lawyers.

Mr Watson, whose clients include Cable & Wireless, BT and KPN Qwest, says, for example, that the regulator took far too long to sort out the issue of local loop unbundling.

BT still controls the last mile of the telephone lines running into most people's homes.

This enables BT to take a large chunk of call revenue for carrying calls on its local assess network.

He says: 'Oftel does have teeth since the new Competition Act came into force at the beginning of last year, but they didn't approach bundling with enough confidence in their new teeth.' Mr Preiskel says: 'They have certainly never used their teeth as far as I can see, although they may have chewed a few thoughts over.

They have had some successes, but they have never said to BT "right, you have to do this by a certain time or you will have to compensate other disadvantaged operators".'Mr Watson adds: 'There is a certain amount of litigation in the sector, but there is scope for more.

Companies should be more aggressive in litigating, particularly against the regulator.' Despite the undoubted slump in the telecoms market, there will be survivors.

As Mr Marchant says: 'For companies in the sector to get funding is more difficult than it was.

A lot of companies - particularly retail operators - will not survive, business will not be sustainable.

But a company in the right position can still get funds if they have got a good story, and are a strong company.' Lucy Hickman is a freelance journalist