South Korea’s spectrum auction has come and gone, with the three major players all securing additional airwaves, but the expected fierce competition didn’t materialise, with two of three blocks going for the reserve prices.

The country’s Ministry of Science, ICT and Future Planning (MSIP) said the auction raised KRW2.11 trillion ($1.82 billion), short of the forecast of KRW2.5 trillion.

Despite the blocks in 1.8GHz and 2.1GHz bands selling at the reserve price, the shortfall was mainly due to 40MHz in the 700MHz band going unsold. With the 2x20MHz block not attracting any bidders due to the high base price of KRW762 billion, the regulator seems to have miscalculated demand for the highly-efficient band from operators, which don’t have coverage issues.

The lack of interest, an analyst said, shows that when regulators set unjustified prices, they risk limiting the availability of spectrum and having to re-auction airwaves for an additional cost, and should be an example for other countries, such as India, when they set auction prices.

LG Uplus’ winning bid for the 20MHz of 2.1GHz spectrum went for the reserve price of KRW381.6 billion, because of the way the regulator structured the reassignment of the spectrum in that band, which expires in December.

SK Telecom (SKT) and KT knew they would have to pay the final auction price (per megahertz) for their existing 40MHz in the 2.1GHz band, which MSIP will reallocate back to the two operators, so they didn’t participate in that auction, allowing LG Uplus to win the five-year licence uncontested. SKT surrendered the 20MHz for the auction.

KT went home with 20MHz in the 1.8GHz band for KRW451 billion, also the reserve price. SKT won two blocks of 60MHz in the 2.6GHz band for KRW1.27 trillion, which was 29 per cent, or KRW287 billion, higher than the minimum price. Those spectrum blocks have ten-year licences.

Impact on debt
As a result of the auctions and the renewal of their existing 2.1GHz blocks later this year, Moody’s estimates that SKT’s and KT’s adjusted debt/EBITDA will increase slightly.

With 25 per cent of the bid payments due upfront, and the remaining 75 per cent paid annually over the ten-year licence period, Moody’s expects the payments to be funded by the companies’ existing cash holdings.

It forecasts SKT’s financial leverage at 1.9x in 2016 without the new spectrum payment and after factoring in an upcoming investment of around KRW700 billion in CJ Hellovision, Korea’s largest cable TV and second-largest pay-TV operator. With the new spectrum obligations, its adjusted debt/EBITDA will rise to around 2.1x.

Moody’s said KT is better positioned to absorb the impact of higher leverage since it reduced its leverage to 2.0x in 2015 from 2.5x in 2014, following last year’s sale of KT Rental and KT Capital. After the spectrum-related debt is incorporated, its adjusted leverage will rise to 2.1x.