DT Plans Acquisitions

Deutsche Telekom AG (NYSE: DT) CEO Kai-Uwe Ricke issued an unguarded challenge to pan-European rivals such as France Telecom SA (NYSE: FTE), Telefónica SA (NYSE: TEF), and Telecom Italia SpA (NYSE: TI) yesterday by saying "We are Europe's number 1 and are determined to remain so." (See DT Outlines Strategy.)

And DT's CEO is ready to buy other carriers to make sure the German company remains the continent's biggest carrier. "We intend to play an active role in the European consolidation process," Ricke is quoted as saying.

The statements came in a wide-ranging strategy document issued ahead of the carrier's annual shareholders' meeting in Cologne. The chest-thumping comments look like a belated response to the M&A activities of Europe's other expansionist incumbents, particularly former partner France Telecom, which last year stated its intention to become "the operator of reference for new telecom services in Europe" when it announced its NeXT program. (See France Telecom Launches NExT.)

The comments come as Europe's carrier community remains gripped by acquisition fever that has seen numerous takeovers in the past 12 to 18 months, many involving Tier 1 national carriers that have expanded outside their home territories. (See Eurobites: No Let-Up on Euro M&A, Eurobites: M&A, IPO & KPN, Telenor on Billion-Dollar Spree, Eurobites: Incumbents Splash Their Cash, FT Takes on Telefónica, Telefónica Swoops In on O2, Belgacom Buys Telindus, and M&A Activities Firm Up BT Global.)

By contrast, DT has been laying low, making just one recent move in snapping up Austrian mobile operator tele.ring Telekom Service GmbH . (See DT Gets OK for Tele.ring.)

Instead the German giant has been sorting out domestic affairs -- including the re-integration of ISP T-Online International AG , plans for a new high-speed access network, slimming down its workforce, and taking on a significant new investor. (See DT Welcomes Blackstone, Deutsche Telekom to Cut 32,000 Jobs, DT Flings Billions at Fiber Access, and DT, T-Online Merger On Track.)

Now, though, CEO Ricke is ready to go shopping. In the document released yesterday the company said "the European countries in which Deutsche Telekom already operates, along with North America, are the markets where the Group intends to strengthen its market position. The Company aims to be the market leader measured in terms of share of market revenue."

In Europe, DT already has operations in nearly every country outside Scandinavia, and is particularly strong in Eastern Europe, where it already controls the incumbent operators in Hungary and Slovakia and has majority stakes in carriers in Croatia, Macedonia, and Montenegro. This seems to be the region where DT could make the most progress towards acquiring market leadership and building a regional presence that could benefit from economies of scale and shared support and management infrastructure.

Acquiring market leadership in Western European markets would be a much tougher and more costly affair. Even if DT were to make a move for significant competitive carriers such as Free in France or Jazztel plc in Spain to boost its existing, but minor, broadband presence with Ya.com in Spain and Club Internet , also known as T-Online France, it wouldn't lead the market.

Buying Dutch incumbent KPN Telecom NV (NYSE: KPN), which is up for sale, would certainly give it market leadership in the Netherlands, and market watchers have floated the idea in the past. But KPN is under intense pressure from cable operators, and is currently valued at $25 billion -- making it more of a target for private equity players. (See Dutch Put KPN on the Block.)

In North America, DT has more than 22 million mobile subscribers at T-Mobile USA , but that's way behind market leader Cingular Wireless , which has nearly 56 million customers. Even a move for another significant GSM mobile operator such as Alltel Corp. (NYSE: AT), which has nearly 11 million wireless subscribers, wouldn't put it close to Cingular. (See Cingular Churns Out Profit in Q1.)

Making a major acquisition might also become more difficult if the company needs to break the bank to land a slice of the new spectrum on offer in the U.S.. The company says it can't talk about the process because of strict rules imposed by the Federal Communications Commission (FCC) , but it's preparing to participate in an auction that could send prices up to $6 billion or even higher. (See T-Mobile, Cable MSOs May Spend on Spectrum.)

The financial pressures of playing a role in acquisitions and buying spectrum will at least be backed up by an increase in annual sales: DT expects 2006 revenues to be as high as €62.7 billion ($79 billion), up from 2005's €59.6 billion ($75.1 billion).

— Ray Le Maistre, International News Editor, Light Reading