Deutsche Telekom Has Designs On The Web

The German giant wants to expand in Europe and the U.S.

The hunger for Internet stocks in Europe borders on desperation. Facing slim pickings, investors have bid up an Italian Net company, Tiscali, to a loftier stock market value than Fiat--in a country where less than 10% of the population surfs the Web. Spain's Terra Systems, a sprawling portfolio of Latin Net companies, enjoys a market cap of $33.6 billion, well above's $22 billion.

But now, investors have an even bigger Europe Net play to sink their teeth into. Deutsche Telekom is preparing to spin off 10% of its Internet access service, T-Online International, in an initial public offering that could value the unit at $40 billion. With 4.2 million subscribers, T-Online is Europe's most popular way to get on the Internet. What's more, unlike rivals such as America Online Inc., Deutsche Telekom has a precious link to the mobile phone, which could make T-Online a monster of the coming rage, the mobile Internet.

BIG EYES. The share sale is crucial for CEO Ron Sommer's plans to make Deutsche Telekom a global Net force. Deutsche Telekom is even preparing to take on the Americans on their home turf. Sommer has said he wants a bigger presence in the U.S. and has been talking to several companies. Shares of Denver-based Qwest Communications International Inc., which operates a worldwide data network, jumped 27% on Mar. 1 on speculation of a possible merger with Deutsche Telekom.

One source close to the negotiations confirmed that the talks have been going on for several weeks, although a merger would be difficult because Qwest has already agreed to buy US West. The source says that US West may voluntarily let Qwest out of its acquisition agreement. Then Deutsche Telekom would bid separately for the two U.S. companies. Qwest CEO Joseph Nacchio is said to support the deal, and would likely receive a high-ranking job at the newly merged Deutsche Telekom.

A big U.S. deal would be a shot in the arm for DT, and after the T-Online IPO, it plans to use T-Online shares to swallow Internet and media properties in Europe and the U.S. Deutsche Telekom will also raise billions more as it spins off its T-Mobil unit and its German cable-TV network. DT's market value is already $260 billion, the largest of Europe's ex-monopolies, and higher than AT&T and Yahoo! combined.

The real test will come over the next two years as the mobile Internet takes off. Players from AOL to the ex-monopolies will be vying to control the mobile Internet, which Deutsche Telekom figures will be worth $20 billion in Europe within two years. Deutsche Telekom has a powerful advantage at home and in Britain. Its D1 mobile service is the second-biggest provider in Germany, and in Britain it owns mobile phone provider One2One. Competitors such as AOL will have no choice but to use such networks if they want to reach their own customers.

Outside Germany and Britain, though, Deutsche Telekom will be at a disadvantage. A key rival is Vodafone, which, with the acquisition of Mannesmann, controls the most mobile phone territory on the Continent. "We have gaps that we have to fill to go toe-to-toe with Vodafone-Mannesmann," concedes Jeffrey A. Hedberg, Deutsche Telekom's chief of international business. But to prevail, Deutsche Telekom will need to offer local content and top-flight service. That's one reason the company last month traded a 6.5% stake in T-Online for Club Internet, France's No. 2 online service measured by regular users.

Can Deutsche Telekom fulfill its global ambitions? Up until now, it has earned mixed marks for its efforts to expand internationally. Joint ventures with France Telecom and Sprint Corp. fell apart after years of losses. The company is a force only in Britain and a few smaller markets such as Austria.

But Deutsche Telekom is hoping more and more to let its money talk. If the German company can succeed in finding the right partners soon, it stands a chance of competing against companies such as Vodafone or AOL--and staying a player in the wired age.

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