Deutsche Telekom Dividend Pressured After AT&T Deal Collapse

Deutsche Telekom Dividend Pressured After AT&T Deal Collapse
Pedestrians pass a Deutsche Telekom AG store in Budapest, Hungary. Phone companies worldwide are facing increasing costs for network build-outs and upgrade as the use of smartphones to download movies and pictures surge. Photographer: Balint Porneczi/Bloomberg

Deutsche Telekom AG’s failure to sell its T-Mobile USA unit to AT&T Inc. for $39 billion may put pressure on the German company to reduce shareholder payouts after next year, investors said.

With the collapse of the deal, stakeholders will miss out on the Bonn-based company’s plan to use the proceeds to repurchase 5 billion euros ($6.5 billion) in stock, cut debt, and receive an 8 percent stake in AT&T. Spending on improving T-Mobile’s network and acquiring spectrum may cost as much as $9 billion, said RBC Capital Markets analyst Jonathan Atkin.

That may detract from Chief Executive Officer Rene Obermann’s efforts to contain damage from the European debt crisis on consumer and corporate spending and to return the region to growth. Spanish rival Telefonica SA last week became the first former phone monopoly in Europe to cut a dividend forecast, sparking similar cuts at Telekom Austria AG. Obermann yesterday wouldn’t commit to dividend levels beyond 2012.

“They won’t fiddle with the dividend right away, but it’s after that where it gets interesting,” said Andreas Mark, a fund manager at Union Investment in Frankfurt, which manages about 170 billion euros including Deutsche Telekom and AT&T shares. “They’re facing the prospect of having to put in money in the medium term.”

Bandwidth Demand

Deutsche Telekom confirmed its shareholder returns program through 2012, including an annual dividend of at least 70 euro cents and buybacks totalling as much as 1.2 billion euros over three years.

Phone companies worldwide are facing increasing costs for network build-outs and upgrade as the use of smartphones such as Apple Inc.’s iPhone to download movies and pictures surge. That has put to test executives’ decisions on how they use the cash generated from phone services.

Deutsche Telekom’s stock has a yield of 7.8 percent, in line with the average for European telecommunications companies, according to data compiled by Bloomberg. Madrid-based Telefonica, even after the lowered 2012 dividend forecast, still yields 12.1 percent, one of the highest in the industry.

Deutsche Telekom today slid 0.3 percent to 8.80 euros at 4 p.m. in Frankfurt, valuing the company at 38.1 billion euros. AT&T rose 0.3 percent to $29.20 in New York.

Slump Accelerates

European governments and consumers are trimming spending to help weather the region’s debt crisis, which started in Greece in 2009. Deutsche Telekom controls the country’s biggest phone company, Hellenic Telecommunications Organizatio SA.

Deutsche Telekom aims to return its European business, which also encompasses countries such as Poland, Romania and Hungary, to growth by 2013. It has also promised to respond to data-traffic growth in the region by rolling out faster wireless and fixed-line infrastructure.

The phone company has concentrated on cost cuts to limit the impact of declining sales on profit across its markets. The revenue slump is set to accelerate to 5.2 percent this year after 3.4 percent last year, according to analysts surveyed by Bloomberg.

“In the current conditions, achieving growth is very, very difficult, that’s why the shares need another attractor,” Obermann said yesterday. Deutsche Telekom “has been a stable provider of payouts in recent years, that’s important for long-term shareholders. And we need those long-term shareholders because the transformation of the company is a task for generations.”

Cash Injections

Obermann is taking on additional task starting Jan. 1, when he will oversee the company’s products and innovation strategy after Ed Kozel’s departure. The job includes strengthening nascent businesses including telemedicine, smart electricity networks and software and music downloads.

AT&T and Deutsche Telekom on Dec. 19 agreed to abandon this year’s largest acquisition after deciding that opposition by U.S. regulators would be too difficult to surmount. The deal would have created a new leader in the U.S. wireless market ahead of Verizon Wireless. The German phone company will receive a breakup package including $3 billion in cash, wireless frequencies and a roaming agreement.

With no realistic buyer for T-Mobile in sight, other forms of combinations are the more likely way forward in coming years for the business, said Bruno Lippens, a fund manager at Pictet Asset Management in Geneva, which holds about 14 million Deutsche Telekom shares. That would probably require cash injections and may weigh on Deutsche Telekom’s free cash flow, or operating cash flow minus capital spending, he said.

‘Strategic Priorities’

“If you’re looking for a plan B now you’ll probably have to invest more in this business,” Lippens said. “And if you don’t have the cash available because you are allocating it to fiber in Germany, and dividends -- and you probably need to do something in Greece as well -- then it just adds to this whole list of strategic priorities that the management has.”

Still, Deutsche Telekom has more room to manoeuvre on dividends than Telefonica and Telekom Austria because it pays out a lower ratio of its free cash flow to investors, Union Investment’s Mark said.

If the company does trim shareholder returns in coming years, it will probably skip share buybacks before cutting the dividend, he said. An alternative would be limiting investments in German and European infrastructure, said the fund manager.

Before Deutsche Telekom agreed on the deal with AT&T, it had also held talks with Sprint Nextel Corp., people with knowledge of the matter said in March. Sprint remains a potential suitor for T-Mobile in the future, analysts say.

“The other alternatives at the time didn’t look nearly as attractive to all stakeholders, including the customers, including the U.S. agenda, the national broadband plan,” Obermann said during an interview, when asked whether it would have been wiser to forge a linkup with Sprint instead of AT&T. “We have to take the proceeds now and move on and make the best out of the situation.”


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