FOCUS: Ericsson, Huawei Watch KPN's Telfort Buy Keenly"

STOCKHOLM -(Dow Jones)- As two key suppliers for Telfort, Huawei Technologies Co. (HWI.YY) and Telefon AB LM Ericsson (ERICY) may be watching the change in the Dutch mobile operator's ownership more keenly than most.

Dutch incumbent Royal KPN NV (KPN) Tuesday agreed to pay up to EUR1.12 billion for Telfort, one of the smaller operators in a highly competitive domestic market. The deal still needs regulatory approval.

Sweden's Ericsson could lose an outsourcing contract for operating Telfort's network as KPN likely has the necessary engineering capability itself, analysts said. When Ericsson won the deal in 2002, it was the biggest of its kind, though the Swedish company has since signed larger services contracts.

For China's Huawei, a KPN acquisition could be an opportunity to build on its still fledgling position in Europe. Huawei recently won an order to supply third-generation wireless equipment to Telfort, and a purchase by KPN could be the Chinese company's chance to show a major blue-chip telecoms address what it can do.

This "gives Huawei a great opportunity to get exposure to KPN - this can only help Huawei's cause in Europe," said Jason Chapman, an analyst at technology research firm Gartner Inc. As for Ericsson, Chapman said there are "some concerns about the future" of the outsourcing contract.

KPN and Telfort both said no decisions have been made on the plans for Telfort's network and declined to comment on the supplier issue.

"It's still too early to go into detail about the integration of the networks," Telfort spokeswoman Clody Derksen said. On Huawei's 3G contract, "for now, it's going ahead as planned," she said.

When Huawei won the 3G order from Telfort in December, analysts said it would likely be the first of many in Europe. The low-cost Chinese manufacturer has since won a major deal from U.K. fixed-line operator BT Group PLC (BT).

Huawei is trying to make inroads in Europe, which has traditionally been dominated by homegrown vendors like Ericsson, Nokia Corp. (NOK) and Siemens AG (SI) and North American suppliers like Nortel Networks Inc. (NT).

A Huawei manager in Europe said he couldn't comment on the impact of the KPN acquisition.

Ericsson spokeswoman Josephine Edwall said the Telfort outsourcing deal lasts seven years, "and from our side the intention is to proceed with it." She said the agreement is binding over the contract period.

The value of the deal hasn't been disclosed but Edwall said Telfort has realized savings of 20% compared with what it would have cost to continue operating and maintaining the network by itself.

Ericsson has since signed several more, and larger, agreements to operate telecoms networks.

A landmark transaction came in April when the company finalized a SEK15 billion five-year agreement with Hutchison Whampoa Ltd.'s (0013.HK) Italian unit to manage its third-generation mobile network. Ericsson has increasingly been working to expand its services business to boost the share of total revenues from 16.4% in 2004.

The company initially targeted operators that lack scale or have the No. 3 or No. 4 position in a market because they are most likely to outsource network operations as they don't have the cost advantage of the bigger players.

"We no longer exclude any operators as potential candidates," Hans Vestberg, executive vice president of Ericsson's global services business unit, said in an interview with Dow Jones Newswires last month.

Spokeswoman Edwall said it's too early to say what KPN might decide to do if the deal to buy Telfort comes through. She notes, however, that "KPN is a customer with which Ericsson also has a close relationship."

Telfort is also a large Ericsson customer.

Telfort's Derksen said the planned rollout of an enhanced data rates for global evolution, or EDGE, network upgrade is proceeding according to plan and will be finished this summer. Ericsson is the supplier for this upgrade.

EDGE networks offer higher data transmission speeds than conventional wireless networks, but aren't as fast as 3G.

Company Web site: http://www.telfort.nl

-By Magnus Hansson and Stefan Simons, Dow Jones Newswires;+46 8 545 130 91, magnus.hansson@dowjones.com (Stefan Simons in Amsterdam and Joon Knapen in Frankfurt contributed to this story)

(END) Dow Jones Newswires"

Posted to the site on 28th June 2005