10 Billion Blown On 3G

The deficit - a consequence of massive asset writedowns - came despite Europe’s fifth-biggest mobile operator boosting core earnings.

The company, formerly BT Cellnet, took a £9.66bn non-cash exceptional charge to help readjust the value of third-generation (3G) licences bought at inflated prices during the height of the telecoms boom in 2000.

Although the firm bought its UK 3G licence for £4bn, it has now valued it at just £2.1bn.

Chief executive Peter Erskine said: "There is a recognition that too much was paid for 3G licences three years ago at the top of the market."

Mr Erskine blamed the writedowns on regulatory UK price cuts squeezing earnings and 3G network roll-out delays caused by shortages of "unreliable and expensive" handsets.

However, mmO2 did see its core pre-tax profit almost double to £859 million, which was near the upper end of analysts’ expectations of between £809m and £870m.

Overall sales grew 14 per cent to £4.87bn for the year to March 31. And the company also saw an 11 per cent increase in its customer numbers to 19.4 million.

About £5.9bn of the writedown relates to the 3G licences the company bought to operate wireless internet services via mobile phones.

As the telecoms bubble burst in 2000 the value of the licences plunged. But further doubt has been cast on their value as the services they were bought to provide have taken longer to roll out than was first expected because of the lack of 3G handsets.

The remainder of the writedown is connected to lower valuations put on other acquisitions to reflect the fall in stockmarkets over the past three years.

Some analysts believe that mmO2 has tidied up its balance sheet to make itself a more attractive takeover target. Mr Erskine did not mention any takeover talks, but said he would do whatever benefited shareholder value.

In a statement, mmO2 said: "We still believe there’s a great long-term future for 3G. It’s a service people will want and will pay for but it will take time for them to adopt it."

Chairman David Varney said: "In these year-end results, the size of the exceptional charges we have taken has masked the strong underlying performance delivered in our first full year as an independent company.

"However, this impairment enables us to go forward with a balance sheet that reflects realistic assumptions about the potential of our business to grow."

Mr Varney added that after the company had disposed of some operations in the Netherlands, it could build on the momentum it had created since it demerged from parent BT Group in November 2001.

Mr Varney said arpu (average revenue per user) - a key industry measure - over the 12 months to the end of March rose to £247 in Britain from £243 in the quarter to December.

Mr Erskine insisted that the company had put in a strong performance in spite of the writedown.

He said: "In mmO2’s first full year as an independent company, it was vital for us to deliver on the commitments made at the time of the demerger; these results demonstrate this was achieved, with the group delivering strong growth and performance improvement."

He added that the group’s "O2" brand, which had been introduced across the whole group, had "achieved awareness and appeal well ahead of expectations".