Deutsche Telekom bid for BT does not add up

Deutsche Telekom CEO Tim Hoettges often says Europe needs fewer, bigger telecommunications carriers that can invest in faster networks and better compete with Google and Facebook. Deutsche Telekom has a 12% stake in BT.

It is an oft-repeated mantra European telecom bosses use when justifying their deal spree of the past four years, during which they have snapped up rivals within countries to reduce competitive pressure and to combine fixed, mobile, and broadband services.

Yet so far they have all stopped short of big bang, cross-border deals, and for good reason: There is deep scepticism that such combinations would generate enough cost savings or revenue growth to justify the premium the sellers would command.

What is more, regulation on everything from broadband to mobile spectrum remains stubbornly national despite years of talk in Brussels of creating a single market for telecoms.

Mr Hoettges could be tempted to test this conventional wisdom by bidding for BT Group.

The German carrier has become BT’s biggest shareholder with a 12% stake after it elected to be paid partly in stock for a holding in EE, Britain’s largest mobile operator, last year.

Mr Hoettges should resist the siren song of such a cross-border deal for now — and move only if a real catalyst emerges that makes a larger European footprint an advantage.

That could be a merger of rivals Vodafone and Liberty Global or a move by regulators to encourage sports and movie rights to be sold across Europe rather than by country.

For now, the BT stake gives him a useful option as companies from France’s Orange to the Netherlands’ KPN stake out ground for the next round of consolidation.

Move too soon, and Mr Hoettges risks throwing away the goodwill he has earned for turning around a money-losing US mobile business and an ambitious network improvement strategy in its key home market.

Deutsche Telekom shares have outperformed major peers like Vodafone and Telefonica since January 2014 when Mr Hoettges took over, as well as the European telecoms index.

The stock trades at more than 16 times time estimated earnings — a premium to BT.

So far Mr Hoettges, who just joined BT’s board, has said he will happily partner with Britain’s former monopoly on technology and marketing projects, and pledged that any deal would have to create value for shareholders.

A deal for BT would be expensive. BT trades at about 15 times estimated earnings, compared with less than nine times earnings four years ago.

Deutsche is more heavily indebted than its British peer: Its net debt is about 2.5 times earnings before interest, tax, depreciation, and amortisation.

To fund a cash offer, Deutsche Telekom would have to sell its 65% stake in T-Mobile US, the third-placed mobile carrier in the US with a market value of $30bn (€27.25bn).

That makes it more likely Deutsche Telekom would have to pay in stock.

If, for example, Deutsche Telekom offered a standard 30% premium for BT, about 596 pence per share all in stock, it would need to come up with at least €1bn of annual pre-tax synergies to make such a deal modestly accretive right off the bat.


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