Deutsche Telekom used to eye the UK telecom market with relish, but it may have lost its appetite at the smell of what's cooking. Late last week, the German operator was said to be considering a sale of its 12% stake in BT, the UK's fixed-line incumbent. Currently worth about £4.3 billion ($5.4 billion), that stake was once seen as a potential springboard to a much bigger role in the UK. Yet the recent "Brexit" referendum, which saw UK voters opt to quit the European Union, has made foreign investors grimace. As its priorities change, Deutsche Telekom could decide on a British exit of its own design. (See Brexit: It's Hard to See an Upside.)

At the time, the deal that made Deutsche Telekom AG (NYSE: DT) a BT shareholder seemed like a smart move. In a £12.5 billion ($15.6 billion, at today's exchange rate) transaction at the start of this year, BT Group plc (NYSE: BT; London: BTA) took full control of EE , the country's biggest mobile operator, from Deutsche Telekom and France's Orange (NYSE: FTE), its joint owners. In a stroke, BT became the dominant force in both fixed and mobile markets, while Deutsche Telekom became BT's largest single shareholder. (See BT Gets Final Go-Ahead for $17.9B EE Takeover.)

The acquisition augured well. BT was flourishing under the leadership of its dashing CEO Gavin Patterson, whose bold gamble on costly football rights seemed to have paid off for the operator's fledgling TV business. By adding high-speed mobile offerings to the service mix, BT hoped to attract new customers and give existing subscribers even less reason to look elsewhere.

The strategy dovetailed with Deutsche Telekom's own approach of developing both fixed and mobile capabilities, and using premium content to lure customers. Moreover, both operators espied enterprise opportunities in the cloud services market, and were investing in all-IP networks to improve efficiency. (See BT, DT Tie-Up Holds All-IP, Cloud Promise.)

All of this held out the possibility of strategic collaboration and joint ventures. There were even suggestions that Deutsche Telekom was preparing the groundwork for a full-blown takeover of BT. Analysts reckoned Deutsche Telekom's all-IP plans could provide the financial rationale for such a move. By replacing UK-specific technologies with all-IP platforms serving a number of European markets, the operator would be able to fatten its margins while boosting sales. (See All-IP DT Could Drive Euro M&A, Say Analysts.)

Brexit fallout
Yet the prospect of Brexit has clearly made the UK a less promising place to hang out. In the referendum's wake, consumer spending held up better than many had feared, but most experts still agree that Brexit will hurt the economy, and might even trigger a recession. The pound has fallen by about 18% against the dollar since the vote, driving up the cost of imports and squeezing disposable incomes. Companies are slashing plans for recruitment and investment, data suggests.

It would be foolish to think communications service providers are immune to the pain. The rising cost of imports seems likely to affect BT in one way or another, whether by inflating its own expenses or making life much tougher for its customers. A "hard" Brexit, to which the current government appears committed, may come with restrictions on immigration, preventing service providers from dipping into the European talent pool as freely as before.

Brexit fears triggered a 14.5% drop in BT's share price on June 24, the day after the referendum. Since then, shares have lost another 6% in value. While the consumer business marches on, concern has grown about BT's much publicized pension deficit, which had widened to about £9.5 billion ($11.9 billion) in September from £6.2 billion ($7.7 billion) in June. In the meantime, calls for the break-up of BT into separate retail and access network businesses have only grown louder, despite regulatory resistance to such extreme measures. In any case, the potential "structural separation" of BT is an obvious worry for shareholders. (See BT Clings On to Openreach – Just.)

Next page: Land of opportunity

Land of opportunity
Exiting the UK would allow Deutsche Telekom to focus on its larger business in the US, according to sources cited by Reuters. The implication that T-Mobile US Inc. could become more integral to group strategy may seem counter-intuitive. After all, for several years Deutsche Telekom has tried offloading T-Mobile US to other US service providers -- only to see competition authorities repeatedly torpedo its plans. Increasingly, the German operator is focused on building a sophisticated pan-European cloud to replace the disparate collection of networks it operates across the region. For all of its swagger, the mobile-only US business, with its off-the-wall schemes, does not seem to fit in.

It has, nevertheless, remained the only part of Deutsche Telekom reporting sales growth, despite management efforts to reinvigorate other units. A growth areas initiative with ambitious goals for connected home and other services proved a dismal failure at its conclusion last year, and was barely acknowledged in the back pages of the annual report. Beset by competitive, economic and regulatory challenges, subsidiaries in various European markets have limped on like wounded soldiers. The daredevil T-Mobile US, by contrast, has been somewhat vindicated by several successive quarters of growth in revenues and profits.

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Even so, T-Mobile US is still dwarfed by market leaders AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ). To prosper in the long run, it will have to find a new buddy, most observers agree. This will not be easy given regulatory opposition to mergers and other tie-ups between service providers. The answer could be a deal with an operator from outside the US, or even the vertical consolidation recently typified by AT&T's $85 billion bid for Time Warner Inc. (NYSE: TWX), the content giant behind productions such as the Harry Potter movies and the Game of Thrones TV series. (See AT&T Shakes Industry With $85B TW Bid.)

Any sale of shares in BT may be a long time coming, if it happens at all. Certain "lock-up" clauses in Deutsche Telekom's original agreement with BT might prove a complication until August 2017. And identifying prospective buyers of UK telecom assets could prove tricky in the current circumstances (just ask Spain's Telefónica , which has more or less given up trying to sell its O2-branded UK business). But considering the almighty stink that now hovers over BT, the German operator may be sick of holding its nose.

— Iain Morris, , News Editor, Light Reading