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.
It’s an oft-repeated mantra European telecom bosses use when justifying their deal spree of the past four years, during which they've snapped up rivals within countries to reduce competitive pressure and to combine fixed, mobile and broadband services.
Yet so far they've all stopped short of big bang, cross-border deals, and for good reason: there is deep skepticism that such combinations would generate enough cost savings or revenue growth to justify the premium the sellers would command. What's 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.
Deutsche Telekom's 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 percent stake after it elected to be paid partly in stock for a holding in EE, Britain's largest mobile operator, last year.
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 the 53-year-old executive risks throwing away the goodwill he's earned for turning around a money-losing U.S. mobile business and an ambitious network improvement strategy in its key home market. Deutsche Telekom shares have outperformed peers like Vodafone and Telefonica since January 2014 when 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, according to Bloomberg Intelligence.
So far Hoettges, who just joined BT's board, has said he'll 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 14.7 times estimated earnings, compared with less than 9 times earnings four years ago. It would also be politically charged given Britain's ambivalent relationship with Europe and the German government's 31 percent stake in Deutsche Telekom.
Deutsche is more heavily indebted than its British peer: its net debt is about 2.5 times Ebitda. BT's debt pile is less than a year's Ebitda, according to Bloomberg data.
To fund a cash offer, Deutsche Telekom would have to sell its 65 percent stake in T-Mobile U.S., the third-placed mobile carrier in the United States with a market value of $30 billion. (That might get easier over time if convergence hits the U.S. as it has in Europe, whetting cable operators' appetite for mobile.)
That makes it more likely Deutsche Telekom would have to pay in stock. If, for example, Deutsche Telekom offered a standard 30 percent premium for BT, about 596 pence per share all in stock, it would need to come up with at least 1 billion euros ($1.1 billion) of annual pretax synergies to make such a deal modestly accretive right off the bat, according to Bloomberg data.
To put that in perspective, Vodafone and Liberty Global are looking for about $3.9 billion in cost savings by combining their Dutch unit. But that involves businesses in the same country, rather than two, making it easier to cut spending on mobile towers, staff and shops. Deutsche Telekom is unlikely to achieve synergies on that same scale with a BT takeover.
Hoettges is fond of arguing the move to software-based networks from today's hardware-based systems will make running infrastructure in multiple countries cheaper and help unlock value in cross-border deals. Deutsche Telekom is ahead of rivals in upgrading its 13-country network to so-called all-IP technology by 2018. Under the plan, it hopes to cut operating expenditures by 25 percent, or 450 million euros. But it remains to be proven that such technology can change the stubborn math of acquisitions.
Hotteges has an option with BT, but he also has the luxury of time. He should take advantage of such a rare position -- and wait.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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