Deutsche Telekom Profit Gains Ease Sting From Failed U.S. Deal

Updated on
  • Phone carrier boosts annual forecast, touts German growth
  • Hangover from failed U.S. merger talks receding: Bernstein

Deutsche Telekom AG may have failed to clinch a mega-merger in the U.S., yet investors aren’t spooked as Europe’s largest phone carrier charts a path on its own.

Shares of the company rose as much as 1.7 percent in Frankfurt after it raised its full-year profit forecast on solid growth in its home market Germany and customer additions at T-Mobile US Inc., just days after ending merger talks for the unit.

The hangover from the failed M&A talks “is receding,” Bernstein analysts led by Dhananjay Mirchandani said. The U.S. is “motoring ahead, Germany solid and the rest of Europe showing some signs of life, especially in mobility,” the analysts said in an emailed note.

Chief Executive Officer Tim Hoettges is under pressure to show he can maintain T-Mobile’s momentum while winning wireless and broadband clients in Germany and turning around some of the struggling European units. While T-Mobile remains a successful challenger and is grabbing customers from Verizon Communications Inc. and AT&T Inc, the company could have used more scale by teaming with Sprint Corp. and needs significant amounts of cash for future spectrum auctions.

T-Mobile US is ideally positioned to be independent because of the low-frequency spectrum it bought that is boosting its network coverage and the transmission speeds it’s offering, Hoettges said on a call with reporters.

The spectrum “was my big M&A,” Hoettges said. “That is not to say that the company is not open to considering consolidation and convergence options to further advance itself in the future.”

Deutsche Telekom’s broader financials are intact. Adjusted earnings before interest, taxes, depreciation and amortization will be as much as 22.5 billion euros ($26.1 billion) this year, compared with a previous forecast for about 22.3 billion euros. Adjusted earnings rose 3.3 percent last quarter, the Bonn-based company said Thursday.

In Germany, sales advanced 0.1 percent. Mobile-service revenue, a key indicator of how well the carrier can monetize existing wireless contracts, climbed 0.9 percent. The challenge in its home market is to win wireless and business clients in the face of competition from Vodafone Group Plc, Telefonica SA and United Internet AG, which is emerging as a fourth large telecom carrier.

Deutsche Telekom will have to focus on operational improvement in Europe, where there are few appealing M&A alternatives. Brexit uncertainty clouds the prospects of the German carrier’s investment in U.K. carrier BT Group Plc, and some of its other markets -- Greece and the Netherlands -- either offer limited growth opportunities or are plagued by intense competition. There is an upward trend at units in Hungary, Croatia, Austria, Poland and the Czech Republic, which all reported rising sales.

Deutsche Telekom wrote down goodwill at its computer-services business T-Systems by 1.2 billion euros, saying it expects orders to decrease further in the fourth quarter after a slowdown in the first nine months of 2017.

The carrier boosted the full-year earnings forecast for a second time, after projecting adjusted Ebitda of about 22.2 billion euros at the start of the year. The company kept its forecast for full-year free cash flow unchanged at about 5.5 billion euros.

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