Deutsche Telekom Sees Obstacles to French Network Merger

Deutsche Telekom AG (DTE) said a combination of its German network with France Telecom SA (FTE)’s domestic system to create Europe’s largest single network would create little value and be too difficult to manage.

“I’m not sure there are many advantages for both parties because you get to limits,” Niek Jan van Damme, Deutsche Telekom’s head of Germany, said in an interview in Cologne today. “The management of a bigger network normally has more challenges than a smaller network.”

France’s new Industry Minister Arnaud Montebourg favors France Telecom merging with its German counterpart to create a group modeled after European Aeronautic Defence & Space Co. (EAD), Journal du Dimanche said June 10. Bonn-based Deutsche Telekom and Paris-based France Telecom already cooperate on joint purchasing of 13 billion euros ($16 billion) worth of items including handsets and infrastructure every year. They also co- own the largest U.K. phone operator, Everything Everywhere.

Van Damme said he couldn’t say whether Deutsche Telekom’s current alliance with France Telecom will lead to deeper integration. He declined to comment on the prospect of a full merger. The German government owns 32 percent of Deutsche Telekom, while France controls 27 percent of its biggest phone company through a direct stake and another held by the sovereign fund Fonds Strategique d’Investissement.

Low Valuations

The valuation of European phone companies has fallen during the region’s debt crisis, with the 19-member Bloomberg Europe 500 Telecom Services Index (BETELES) near the lowest in three years. That has invited investors such as Carlos Slim’s America Movil SAB, which last month made an offer to increase its stake in Royal KPN NV, and may facilitate the return to large intra-European telecommunications deals reminiscent of Vodafone Group Plc (VOD)’s 1999 takeover of Mannesmann AG and Telefonica SA (TEF)’s 2005 move on O2 Plc.

Deutsche Telekom shares jumped 1.7 percent in Frankfurt today, while France Telecom gained 1.5 percent in Paris.

The French Minister discussed the ideas of combining the companies in a June 4 meeting with France Telecom Chief Executive OfficerStephane Richard, Journal du Dimanche reported, without saying where it got the information. A representative at Montebourg’s ministry couldn’t immediately be reached today for comment.

Cost Pressure

Europe’s former phone monopolies are under pressure to cut costs as the crisis saps demand for services. A combination of Deutsche Telekom and France Telecom would create a company with sales of more than 100 billion euros, assets covering most European markets and stretching from the U.S. to the Middle East.

“Even if there are numerous topics of discussion and collaboration between Deutsche Telekom and France Telecom, there is no discussion about a merger,” Tom Wright, a France Telecom spokesman, said today.

Members of Deutsche Telekom’s supervisory board have discussed how to deepen the cooperation with France Telecom, according to a person familiar with the situation, who declined to be identified because it’s an internal matter.

Suggestions include obtaining access to emerging markets through France Telecom’s network, cross-border phone service free of roaming charges, joint negotiations with content providers and building shared fiber-optic networks in border regions, according to a document obtained by Bloomberg News.

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 at kwong11@bloomberg.net

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