Investors hang up on cut-rate call firms

Telecoms investors have taken the advertising campaign of one of the UK's largest providers of cut-rate phone calls to heart. Unfortunately, while Planet Talk claims customers would be mad not to use its services, bankers suspect they would have to be mad to put cash into any of its rivals.

This week saw two more telecoms companies forced to call in the administrators as investors balked at the high cost and low margins of providing alternative services.

RSL Communications and Dolphin Telecom have several things in common. Both have North American parents with funding troubles of their own and by coincidence, both had big operations in Hampshire.

RSL called in PriceWaterhouseCoopers on Tuesday after failing to find a new investor, despite being one of the UK's largest independent suppliers of international and mobile services to business customers. Dolphin Telecom called in Deloitte & Touche the following day and canned about half its 750-strong workforce. Dolphin operates a digital mobile radio network, and counts the Metropolitan Police and BBC among its customers.

One of Dolphin's major customers said yesterday the service is still running but that he has received no information about how long it will continue.

Both sets of administrators are looking for buyers or investors, hoping they can replicate the recent rescue of One.Tel's UK business. Earlier this year, Australian One.Tel floundered despite the backing of media stars Lachlan Murdoch and James Packer. Mr Murdoch, heir to the News Corporation empire, and Mr Packer, son of media tycoon Kerry Packer, could now be liable for part of the £30m owed by the company.

The UK operation, which provides cut-rate international phone calls, was bought out in July by Centrica to boost its fledgling telecoms business British Gas Communications.

But analysts suspect bailing out Dolphin and RSL will be trickier as many potential buyers - such as other telecoms companies - have enough financial problems of their own.

"The major telecoms companies are not going to be the white knights for these businesses," said Mike Canfield, principal consultant at research house Ovum.

"Many of these companies are not up the glamorous end of the industry. They only have small margins to play with so in a downturn they will be hard hit."

Investors are also unlikely to rush into the breach. John Allen, chairman of telecoms investment specialist ARC Associates, has spent 15 years investing in and advising telecoms companies. He believes there are bargains to be had but only if investors stick to a golden rule, often broken by smaller telecoms businesses.

"The first and most important point is how soon can they actually start making revenues and do they have enough funding to get there? Get back to the basics. If there is no clarity on this, then avoid them like the plague."

At Planet Talk newly appointed marketing manager Behzad Saed Nejad takes this warning to heart. For him, one of the most important tasks is to retain customers and increase the amount they spend by widening Planet Talk's product range.

"One of the things we are going to do at Planet Talk is learn from the mistakes of other people. All our major competitors have customers that are very transient; they sign up today and they leave tomorrow."

Planet Talk is planning a Christmas promotion of the company's new cut-price mobile service. Some of its rivals are not able to think that far ahead but Planet Talk's parent recently received additional funding. Paradoxically it was on the same day that Dolphin called in the administrators that Primus Telecommunications announced it had secured an extra $37m.

Behzad Saed Nejad is confident that Planet Talk will be able to use that cash to pick up customers from its ailing rivals.

"I am very very confident that we will be one of the few to survive," he said.