German giant lines up sale of broadband assets in France and Spain and is looking for mobile acquisitions. Major IPTV push also planned

March 1, 2007

5 Min Read
DT Plans M&A, IPTV Push

As expected, Deutsche Telekom AG (NYSE: DT) outlined its new strategy this morning, including potential asset sales and wireless acquisitions, as it announced 2006 full-year and fourth-quarter financials that largely met with analyst expectations. (See DT Outlines Strategy and DT Plans Strategy Revamp.)

The carrier's CEO, René Obermann, told investors today that DT is no longer ruling out international acquisitions for its T-Mobile International AG wireless division and that "there might be moves outside our existing footprint," though any acquisitions would be based on "strict financial criteria."

He added that there's also the possibility of consolidation in markets in which T-Mobile is already active, "where that makes sense...

"We shouldn't rule out opportunities abroad any longer, but we won't rush into it -- we are under no time pressure. We will pick the opportunities when they are right, so let's not get too excited about it. This is a long-term plan -- this is not all happening tomorrow."

T-Mobile currently has operations in Germany, the U.S., the U.K., Poland, Austria, the Netherlands, the Czech Republic, Hungary, Croatia, Slovakia, Macedonia, and Montenegro. Globally it has 106.4 million mobile customers -- 81.4 million in Europe, and 25 million at T-Mobile US Inc. (which grew by 3.3 million customers in 2006).

And while acquisitions are a possibility, so are divestments, which could bring in as much as €3 billion (US$4 billion). DT is examining the possible sales of its wireless towers in the U.S. and Germany, the media and broadcast unit of its T-Systems International GmbH services and integration business that serves broadcast and media companies, some real estate holdings, and its fixed broadband businesses in France and Spain.

The latter two are Club Internet , the French triple-play ISP that is one of the few service providers delivering commercial IPTV services based on the Microsoft Corp. (Nasdaq: MSFT) platform, and Spanish DSL player Ya.com . (See Club Internet Unveils IPTV and Ya.com Uses Alcatel for Triple Play.)

DT clearly feels that it can't make meaningful inroads in these markets. Competition in the French broadband market is particularly intense, where Orange (NYSE: FTE) and Iliad (Euronext: ILD) dominate the sector. Telefónica SA (NYSE: TEF) and cable operator ONO dominate the Spanish high-speed access market, though Jazztel plc has made some inroads. (See Iliad Plans €1B FTTH Build and FT Fleshes Out FTTH .)

But while international markets dominated the carrier's M&A strategy, Obermann said the main focus of the company would be on its domestic market. "Germany still accounts for 54 percent of our revenues -- there is a lot to lose. Increased competitiveness in Germany is central to our strategy," said Obermann, adding that price pressures, mobile substitution of fixed lines, and strong mobile competition all need to be tackled.

So the carrier is going to pour money into domestic marketing and consolidate its 20-plus existing retail brands down to just two, T-Home and T-Mobile. It's also continuing with its high-speed broadband rollout and will be pushing its IPTV service hard.

To Page 2

FTTx, DSL, and IPTV
Despite suggestions earlier this year that the carrier was abandoning its planned fiber-to-the-curb (FTTC) rollout, DT still plans to build out FTTC and VDSL2 connections to homes in 50 cities, covering 8 million homes by the end of 2008. It will also upgrade its DSLAMs with ADSL2+ technology in a further 750 towns and cities during the next two years so it can offer IPTV services, which were launched in the fall of 2006, nationwide.

By the end of 2007, DT plans to have its IPTV service available to 17 million homes, or 44 percent of all German homes, which would be a three-fold increase from the end of 2006.

It also aims to launch interactive services on its IPTV platform and introduce an entry-level pricing scheme to attract new customers. DT looks to have up to 200,000 telco TV customers by the end of 2007 and 1.5 million IPTV subscribers by 2010. The carrier currently has 6.3 million retail DSL customers in Germany. (See Microsoft Wins IPTV Deal at DT.)

In need of a friend
For business customers, DT has seen the kind of success BT Group plc (NYSE: BT; London: BTA)'s Global Services division has had in targeting the international communications and IT needs of enterprise customers (which BT counts as part of its "New Wave" revenues), and it wants a piece of that action. (See BT Reports Q3, BT Plans Further Global Push, and Unilever Extends BT Deal.)

But DT doesn't have the muscle that the likes of BT, Orange Business Services , and Verizon Enterprise Solutions boast, and Obermann knows this. "We lack international footprint. We are determined to develop enterprise services, but we don't think we can do that by ourselves, so we are looking for strategic partnerships."

The financials
The German incumbent reported 2006 revenues of €61.3 billion, and an annual net profit of nearly €3.2 billion. Fourth-quarter revenues were €15.5 billion. (See DT Reports Q4, Full Year .)

The one surprising number was a fourth-quarter net loss of €898 million ($1.2 billion), compared with consensus analyst expectations of €667 million ($882 million). But analysts at Dresdner Kleinwort noted this was due to DT lumping all the remaining costs related to its planned 32,000 job cuts into that quarter, instead of spreading them throughout 2007. The total costs related to those headcount reductions have now totaled €3.4 billion ($4.5 billion). (See Deutsche Telekom to Cut 32,000 Jobs.)

Overall, DT's numbers and plans didn't please investors. The carrier's share price dropped $0.76, more than 4 percent, to $17.20 in morning trading.

— Ray Le Maistre, International News Editor, Light Reading

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