Deutsche Telekom is plotting a takeover of UK fixed-line incumbent BT following the sale of its controlling stake in T-Mobile US, according to a report from the UK's Telegraph newspaper.
The German operator appears keen to quit the US market and focus on its European heartlands, and its strategy of building a cross-border, all-IP network across the European region could justify a move for BT Group plc (NYSE: BT; London: BTA). (See T-Mobile US Sale Fits DT's All-IP Game Plan.)
Last week, Deutsche Telekom AG (NYSE: DT) was reported to be in discussions about selling its 67% stake in T-Mobile US Inc. to satellite TV company Dish Network LLC (Nasdaq: DISH). It intends to use the proceeds from that sale to buy the UK's former state-owned telecom monopoly, according to the Telegraph, which cites industry sources close to the matter.
Although Deutsche Telekom has insisted it is not planning any takeover activity outside its existing network footprint, city analysts have previously told Light Reading they expect the German operator to attempt to buy assets in other European markets following a T-Mobile sale.
Deutsche Telekom is in the process of building an all-IP European network that will allow it to offer services across the region from a smaller number of production facilities, and this all-IP conversion provides a financial rationale for cross-border takeover activity, according to experts at Exane BNP Paribas and Goldman Sachs & Co. . (See All-IP DT Could Drive Euro M&A, Say Analysts.)
The theory is that Deutsche Telekom would be able to bulk up and improve its margins by acquiring operators and then shedding systems and employees it would have needed in the pre-all-IP world.
Goldman Sachs had previously hinted at the possibility Deutsche Telekom could acquire BT when commenting on the nature of BT's £12.5 billion (US$19.1 billion) move for mobile player EE , a joint venture between Deutsche Telekom and Orange (NYSE: FTE).
Deutsche Telekom is set to hold a 12% stake in BT -- making it the UK incumbent's largest shareholder -- following the completion of that deal. (See BT Locks Down £12.5B EE Takeover Deal.)
"We believe that Deutsche Telekom's decision to take BT equity in exchange for its share of EE creates a strategic option for Deutsche Telekom over the long term, should the case for pan-European consolidation become more concrete either due to regulatory change or as the existence of cross-border cost savings becomes proven in Eastern Europe," said Tim Boddy, an analyst with Goldman Sachs, in a research note issued in March.
"We note that cross-border combinations between certain other assets in the sector may not enjoy a similar rationale, given many operators' slower progress than Deutsche Telekom towards a common all-IP infrastructure," added Boddy.
Boddy regards Deutsche Telekom as something of an all-IP pioneer, noting its commitment to switch off all PSTN systems by 2018, but says BT, KPN Telecom NV (NYSE: KPN) of the Netherlands and Swisscom AG (NYSE: SCM) are also forging ahead in this area.
KPN has already migrated more than 60% of its customers to IP networks, according to Goldman Sachs, while Swisscom and BT aim to complete their all-IP transformations by 2017 and 2025 respectively.
Kohulan Paramaguru, an analyst with Exane BNP Paribas, also believes that all-IP transformation could spur takeover activity.
"Deutsche Telekom is the company pushing all-IP the most [and] the stake in BT is a sign of that," he recently told Light Reading. "Deutsche Telekom won't be able to by anything of size till it sells T-Mobile US, though, since it is too highly leveraged. Post a T-Mobile sale we would expect Deutsche Telekom to purchase assets in Europe."
Deutsche Telekom's net debt is currently equal to about 2.6 times its annual EBITDA -- outside a comfort-zone ration of 2-2.5 -- but its stake in T-Mobile US is worth as much as $21.8 billion, based on the US operator's current market capitalization on the New York Stock Exchange (NYSE).
BT's market capitalization on the NYSE is currently about $56.1 billion.
But Deutsche Telekom would be unable to execute a move imminently: Its deal with BT over EE precludes it from owning more than 15% of BT for three years after the date of the transaction, which is expected to happen early next year.
Moreover, while European regulators seem to have warmed to the idea of cross-border consolidation, Deutsche Telekom could encounter opposition from UK authorities given BT's strategic value to the country.
A UK exit from the European Union (EU) might also put Deutsche Telekom off a deal, the Conservative government having pledged to hold a referendum on EU membership by the end of 2017.
Speculation about a Deutsche Telekom move for BT comes as other large operators in the region consider whether to acquire assets to improve their competitive positioning.
Last week, mobile operator Vodafone Group plc (NYSE: VOD) confirmed it was in talks with Liberty Global Inc. (Nasdaq: LBTY), which owns a number of cable operators across Europe, about a possible exchange of assets. (See Vodafone Could Buy Virgin Media, Quit Germany, Says Analyst and Vodafone in Asset-Swap Talks With Liberty.)
Meanwhile, Hong Kong's Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY) is trying to secure regulatory approval for a £10.25 billion ($15.7 billion) takeover of Telefónica UK Ltd. , which it hopes to merge with its Three UK business. Hutchison is also said to be negotiating a merger of its Italian mobile phone business with Wind Telecomunicazioni SpA , a rival operator owned by Russia's VimpelCom Ltd. (NYSE: VIP). (See Telefónica Seals $15.2B O2 Sale to Hutchison, Hutchison's Wind of Change and Hutch, VimpelCom in Talks About Italian Job.)
— Iain Morris, , News Editor, Light Reading