Deutsche Telekom’s German Powerhouse Loses Steam on Cable

Deutsche Telekom AG (DTE)’s German sales decline may have accelerated in the past quarter as competition from wireless and cable companies intensified, making it tougher to make up for a slump in markets such as Greece and Romania.

Europe’s biggest phone company has relied on Germany, whose economy has been less vulnerable to the region’s debt crisis, to balance customer losses in eastern Europe and at T-Mobile USA. Now, even broadband and television packages used to offset shrinking phone-line sales are slowing, and Deutsche Telekom may have to cut prices to stem market-share losses, analysts say.

Third-quarter revenue in Germany probably dropped 4.9 percent to 6 billion euros ($8.2 billion) from a year earlier, according to the average estimate of seven analysts compiled by Bloomberg. That compares with a decline of 3.4 percent in the previous three months and would be the third consecutive decrease. In the second quarter, Deutsche Telekom generated 55 percent of sales from continuing operations in Germany.

“At some point that drop has to stop and they have to say ’this far and no further,’” said Heinz Steffen, an analyst at Fairesearch GmbH, who has a “reduce” rating on the stock.

Deutsche Telekom dropped as much as 2.4 percent to 8.80 euros in Frankfurt trading and was down 2.1 percent as of 9:48 a.m., valuing it at 38 billion euros. Before today, the stock had declined 6.6 percent, while the 21-company Bloomberg Europe Telecommunication Services Index lost 7.4 percent.

Margins Peak

The company’s German unit, led by Niek Jan van Damme, has focused on cost cuts, helping it attain a record ratio of adjusted earnings before interest, taxes, depreciation and amortization to sales of 40.7 percent in the second quarter. The company plans to fold its information technology systems into one unit, people familiar with the plan said last month. That would add to a cumulative 4.2 billion-euro cost-savings plan running from 2010 through 2012.

“It’s going to be very hard” for the company to raise its Ebitda margins, said Will Draper, am Espirito Santo analyst. “Only if they cut a lot of additional costs.”

Deutsche Telekom’s third-quarter adjusted Ebitda may have dropped 3.9 percent to 3.8 billion euros as sales fell 3.5 percent, excluding the U.S. business, according to analyst estimates. The company is scheduled to report earnings Nov. 10.

While Germany’s economy has been more resilient than Spain, Italy and France to the region’s debt crisis, growth is starting to cool there, too. Unemployment unexpectedly rose for the first time in more than two years in October, while business confidence fell to a 16-month low. Economic growth may slow to 0.8 percent next year from 2.9 percent, a government- commissioned report showed.

Weakening Powerhouse

“Any signs that the German economic powerhouse is showing some signs of weakness” may damp consumer demand and corporate spending, said Berenberg Bank analyst Paul Marsch.

In the second quarter, Deutsche Telekom’s revenue slipped 3.3 percent, excluding the U.S. unit, led by declines in Greece, Romania and Hungary. In the U.S., it’s fighting a government lawsuit to block the proposed $39 billion sale of T-Mobile USA to AT&T Inc. (T)

At home, Deutsche Telekom is under attack from cable operators selling combined phone, broadband and TV services.

‘Big Problem’

Kabel Deutschland Holding AG (KD8), Germany’s largest cable operator, said the number of phone and Web clients climbed 21 percent in the quarter ending June 30 for a total of 1.4 million. Unitymedia, the country’s second-largest cable company that’s owned by Liberty Global Inc. (LBTYA), posted a 57 percent increase in broadband subscribers last quarter. Deutsche Telekom had 85,000 net additions of broadband clients in Germany in the second quarter, after 130,000 a year earlier.

“Cable is going to become a very, very big problem in Germany for Deutsche Telekom,” Espirito Santo’s Draper said.

Competition is also intense in the German mobile-phone market. Last month, for the first time, Deutsche Telekom shared a release of Apple Inc.’s popular iPhone with other providers. The company’s German mobile revenue fell 1.2 percent in the quarter ended June 30 even as data-plan sales picked up.

Royal KPN NV’s E-Plus unit, the only of the four wireless operators in Germany that has reported third quarter earnings, expanded its customer base by 11 percent to 22.1 million users.

Mobile customers at Telefonica SA (TEF)’s German division jumped 9.1 percent in the quarter ended June 30 to 17.7 million and Vodafone Group Plc (VOD) added 3.3 percent to 36 million. That compared with a 6.8 percent decline to 34.5 million customers at Deutsche Telekom, which included the automatic termination of unused prepaid cards introduced last year.

Entertain TV

Vodafone, the world’s biggest mobile-phone operator, may say tomorrow first-half sales climbed 3.5 percent to 23.4 billion pounds ($37.5 billion). Telefonica, Europe’s second- largest phone company, on Nov. 11 may report a 3.4 percent increase in third-quarter sales to 15.8 billion euros.

To bolster sales, Deutsche Telekom is trying to counter slowing growth for its Entertain television offering.

The company aims to sell between 2.5 million and 3 million television packages by the end of 2012. It has sold 1.6 million packages by the end of 2010. The company added a net 44,000 TV customers in Germany in the second quarter, down from 75,000 a year earlier.

Deutsche Telekom’s TV product costs at least 22.95 euros per month. Kabel Deutschland’s cheapest TV package costs 18.90 euros.

The phone company has added distribution via satellite to gain customers in areas with less access to broadband lines and plans to extend the service to devices including tablet computers and mobile phones next year.

If Deutsche Telekom’s current broadband market share of 46 percent falls to 45 percent or below, the company “may signal to the market that they have to be more aggressive on prices,” said ING Financial Markets analyst Jeffrey Vonk. “Broadband market share will be crucial.”

To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong in Berlin at kwong11@bloomberg.net

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