Deutsche Telekom to Buy OTE Stake

Deutsche Telekom AG (NYSE: DT) has entered a purchase agreement with Marfin Investment Group to acquire the 20 percent stake the investment firm holds in Greek national operator OTE S.A. for €2.5 billion (US$3.9 billion). (See DT Buys OTE Stake.)

But Deutsche Telekom is only interested in acquiring the OTE stake if the Greek government will agree to let it have management control of OTE and allow it to increase its stake beyond 20 percent. The deal is conditional upon these two requirements being met, as well as the approval of Deutsche Telekom's supervisory board. (See Greek Slapdown.)

The first public responses from the Greek government look positive. The ministries of finance and telecommunications issued a joint statement today and described the agreement between Deutsche Telekom and Marfin as "a welcome development, and conforms with the government's strategy on OTE."

Given this initial reaction from the Greek government, which owns a 28 percent stake in OTE, Deutsche Telekom seems confident that the deal will be completed. "There is a possibility for us to go through with this kind of strategic interest," says a Deutsche Telekom spokesman.

The spokesman says Deutsche Telekom will now start negotiations with the Greek government and that those talks are expected to conclude during the next six weeks.

If the deal goes through and Deutsche Telekom's terms are met, it would mark a change in the Greek government's attitude to foreign investment in its national telecom operator compared to a year ago. Last year, Telekom Austria AG (NYSE: TKA; Vienna: TKA) abandoned its attempt to acquire a strategic stake in OTE because the government would only allow it to hold a minority stake without management control. (See Telekom Austria Makes Greek U-Turn, EuroBites: So Sell Me!, Eurobites: M&A Hotbed, and Eurobites: Upheaval, M&A, and Disaster.)

Dresdner Kleinwort analyst Georgios Ierodiaconou believes the time is right in Greece for Deutsche Telekom's conditions to be considered.

"We believe that the government will be willing to share or concede control," writes Ierodiaconou in a research note. "The law designed to cap [Marfin's] participation in OTE is under investigation by Brussels. The successful implementation of the next stage of [OTE's] privatization lies in a strategic partnership with a major European incumbent."

Deutsche Telekom's M&A strategy is focused on international mobile acquisitions. But the operator's spokesman says the OTE investment would fit that bill even though it is a national carrier with substantial fixed-line operations. (See DT Goes Double Dutch for $1.9B, DT Plans M&A, IPTV Push, and Carrier Scorecard: T-Mobile.)

"The strategy is to grow abroad with mobile, but just because we get a fixed-line operator along with the mobile operations does not mean we'll rule out a deal," says the spokesman. "[OTE] is of course a good mobile deal. But the mobile asset would not have been possible without that bigger constellation."

Dresdner analyst Ulrich Rathe says OTE is a "good strategic fit" for Deutsche Telekom.

"The geographic footprint is complementary, with the small exception of Macedonia," writes Rathe in a research note. "Deutsche Telekom would be able to expand its mobile footprint across [southeast] Europe. And Greece itself is a major cash generator."

— Michelle Donegan, European Editor, Light Reading