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13 September 2021

Deutsche Telekom moves its compass still further to the USA, as it exits Netherlands

Deutsche Telekom has been steadily reassessing its international portfolio and making strategic choices about where to focus its efforts, with the group becoming increasingly US-centric.

As expected, Deutsche Telekom has sold its Dutch business, T-Mobile Netherlands, in which it held a 75% stake, the rest being owned by Tele2. The two operators will sell the unit, not to Reliance Industries as was reportedly under discussion, but in a far less disruptive choice as far as the European 5G landscape is concerned. The Dutch MNO will be acquired by private equity firms Apax and Warburg Pincus for €5.1bn ($6.1bn). DT will get €3.8bn ($4.5bn) of that.

The acquirers will be interested in TMO NL’s recent growth streak, which followed a period of restructuring including the carve-out of towers. In its most recent quarter, Q2 2021, it reported profits up 13% year-on-year to €184m ($218m), on sales up 5.4% to €506m ($601m). Its fixed-line business was particularly important, as it started to bounce back against the competitive impact of the merger of Vodafone NL with cableco Ziggo (owned by Liberty Global).

Despite this strong performance, the Dutch market appears to be too small, crowded and saturated to interest Deutsche Telekom any longer, as the company looks to focus its investments on fewer, larger markets, mainly its home country plus the USA – though it is still a major force in central Europe and is hinting at increasing its stake in the UK’s BT. Deutsche Telekom is investing heavily in its two largest markets, as it expands fiber in Germany and 5G in both, and in the first half of this year, the telco’s capex doubled year-on-year to €16.6bn ($19.7bn) – 90% of it spent in the two large markets. Excluding spectrum payments, 55% of capex was spent in the USA as T-Mobile accelerated its 5G build-out.

Now it needs to concentrate on gaining return on those investments, while reducing capex spending elsewhere and cutting down its debt. At the end of June, that debt stood at €96.8bn ($114.9bn), about three times annual earnings (DT’s target is about 2.5 times).

To increase its influence over T-Mobile USA, and its share of TMO’s increasing sales and value, DT is upping its stake in the US operator by 5.3 percentage points to 48.4%. It acquired the additional shares from Japan’s Softbank, which holds a stake in TMO thanks to its acquisition of Sprint, which merged with TMO last year. In return for selling the shares to DT, Softbank has gained a 4.5% stake in the German telco and $2.4bn in cash.

DT’s US arm brought in 63% of group sales and 64% of earnings in the first half of fiscal 2021, and sales were up by over 20%, compared to 2% for DT Germany.

Marcelo Claure, corporate officer, COO of Softbank Group and CEO of Softbank Group International, commented: “The transaction diversifies our telecoms exposure and results in Softbank becoming DT’s second largest private shareholder, while retaining meaningful exposure to high-growth TMUS. I look forward to partnering with Tim and team long into the future.”

Just as important as the financial arrangements may be an agreement when Deutsche Telekom becomes a strategic European partner in the Softbank ecosystem. The companies said they will co-develop and co-invest in new services, including scaling and investing in global connectivity platforms, with a focus on enterprise and IoT.

Claure will be appointed to the Supervisory Board of DT at the next annual general meeting. In the longer term DT may exercise call options to acquire another 20m TMO USA shares from SoftBank by reinvesting $2.4bn of proceeds from the proposed sale of TMO Netherlands.

Tim Höttges, DT’s CEO, has hinted in the past that his company might increase its stake in BT, following the $3.1bn investment in the UK operator by French billionaire Patrick Drahi – chairman of Altice Group. This enabled Drahi to leapfrog DT to become BT’s largest shareholder with a 12.1% stake, compared to DT’s 12%.

At a recent shareholder meeting, Höttges said: “I would say that in the next 12 months something is going to happen with the [BT] asset because the shareholder side is changing rapidly …. We have a lot of optionality in the BT business,” he said. “It’s too early to make a decision. We are entertaining all options.”

Deutsche Telekom might sell its stake to Drahi and Altice, and put the funds towards debt reduction and German fiber build-out, but Höttges has said BT is “highly undervalued”, with the shares falling in value by more than half since Deutsche Telekom acquired its stake in 2016. Another option may be to increase its holding to become the largest share owner again and exert greater influence in the large, if over-competitive, UK market.