March 1 (Bloomberg) -- Deutsche Telekom AG, Europe's largest telephone company, posted its first loss in more than two years after half a million German customers defected and costs to cut jobs soared.

The net loss was 898 million euros ($1.2 billion) in the fourth quarter, after a profit of 991 million euros a year earlier, the Bonn-based company said in a statement today. Sales rose 2.4 percent to 15.9 billion euros.

Rene Obermann, who replaced Kai-Uwe Ricke as chief executive officer in November, plans to cut 2 billion euros in costs, including marketing and staff, this year. Fixed-line sales have fallen for four years as users moved to Vodafone Group Plc and Telecom Italia SpA, and Obermann today said he may spur growth with mobile-phone takeovers, reversing Ricke's strategy.

``The focus in the near future should be on the domestic operations and putting them in better shape,'' said Heinrich Ey, who helps manage more than $90 billion at Allianz Global Investors in Frankfurt, including Deutsche Telekom shares. ``It would make sense to look at smaller acquisitions to help consolidation in markets such as the Netherlands.''

Germany's former phone monopoly had been expected to report a profit of 721 million euros, according to analysts surveyed by Bloomberg. The company last reported a loss in the third quarter of 2004, according to Bloomberg data.

Mobile Acquisitions?

Deutsche Telekom shares fell 52 60 cents, or 3.8 percent, to close at 13.04 euros in Frankfurt. The stock is little changed in the last 12 months, trailing a 17 percent increase in the 24-member Bloomberg Europe Telecommunications Index.

Excluding one-time costs, mainly caused by charges linked to the job-reduction program, fourth-quarter net income fell 20 percent to 824 million euros.

Obermann, 43, said today he'll consider acquisitions to build up T-Mobile, the wireless unit, which has 106 million customers in 11 European nations and the U.S. T-Mobile replaced the fixed-line division as the biggest contributor to the company's operating profit last year.

``Consolidation is meaningful in certain markets,'' he said at a press conference in Bonn, without elaborating.

Possible targets might include France Telecom SA's Orange unit in the Netherlands, Bouygues SA's wireless division and Greece's Hellenic Telecommunications Organization SA, Allianz's Ey said.

Possible Sales

Competitors have been more active. Vodafone, the world's largest mobile-phone company, this month agreed to buy control of India's Hutchison Essar Ltd. for $11.1 billion. Egyptian billionaire Naguib Sawiris agreed to acquire Greek mobile-phone operator TIM Hellas Telecommunications SA.

Deutsche Telekom said today it will seek a ``strategic partner'' for the T-Systems technology-services unit. It will also review the possible sale of assets including the T-Systems media and broadcasting unit, Web units in France and Spain, radio towers in Germany and the U.S., and the real-estate arms DeTe Immobilien and Sireo.

The Web units and the German and U.S. towers may be worth 2.9 billion euros, JPMorgan Chase & Co. analyst Hannes Wittig estimates. Deutsche Telekom's 8 billion euros in real estate is ``unlikely to be materially undervalued,'' he wrote today.

Deutsche Telekom aims to receive 3 billion euros in proceeds from asset sales.

Web Customers

The company wants 1.5 million customers for its Web TV service by 2010 and said its VDSL fiber-optic network will cover 50 German cities by 2008. An additional 750 cities are scheduled to be covered by an ADSL2+ fast Web network.

By the third quarter, Deutsche Telekom plans to introduce a second, cheaper brand that offers fixed-line and wireless calls, following the strategy of discounters such as Royal KPN NV's E- Plus mobile-phone unit.

Obermann inherited a four-year program to eliminate as much as 4.7 billion euros in costs and cut 32,000 German jobs by the end of 2008. About 12,200 workers had left Deutsche Telekom by the end of 2006. The company has 248,000 workers.

Costs to cut positions affected adjusted earnings, before interest, tax, depreciation and amortization, by about 2.8 billion euros last year.

Obermann said today as many as 50,000 workers may be moved to the T-Service customer-service unit this year and negotiations with unions will begin ``as soon as possible.''

German Challenge

Fourth-quarter adjusted Ebitda fell 13 percent to 4.55 billion euros, mainly because operating profit fell at the combined fixed-line and Web unit. The company last month cut its 2007 forecast for adjusted Ebitda to 19 billion euros.

Deutsche Telekom ``has massive problems in its German business,'' said Chris-Oliver Schickentanz, head of research at Dresdner Bank AG in Frankfurt. ``Some investors might also have expected a slightly higher dividend.''

Deutsche Telekom plans to pay an unchanged dividend of 72 cents a share. Analysts had expected a payment of 74 cents. Net debt stood at 39.6 billion euros at the end of December.

Credit-default swap contracts based on 10 million euros of the company's debt traded at 28,500 euros today, little changed from yesterday. The contracts have fallen from 38,000 euros since the beginning of the year, according to data compiled by Bloomberg. A drop indicates an improvement in credit quality.

To contact the reporter on this story: Kenneth Wong in Bonn at kwong11@bloomberg.net.

Last Updated: March 1, 2007 12:23 EST