T-Mobile: Best of a Bad Lot

Deutsche Telekom AG (DT) today announced a first quarter net loss of €1.8 billion, compared to €0.4 billion in the same period a year ago (see DT's press release). The massive German operator's income is being dragged down by a moribund wireline business and a massive debt burden. Its mobile arm, while still losing money, at least has growth prospects.

T-Mobile, Deutsche Telekom’s mobile baby, is one of the two major players in its home patch and a golden boy in the U.S.

VoiceStream, the U.S. mobile subsidiary, looks set to thrive. Joeri Sels, an analyst at Bank Julius Baer in Frankfurt, expects VoiceStream to add between 2 million and 2.5 million subscribers per year over the next couple of years. He believes the rumored mergers "might" happen (see AT&T and Cingular: Hot for VoiceStream?), but says there is no absolute need to cross the T with anything else. He says VoiceStream is growing three times faster than the market and should continue to do so -- if only because of its relatively lavish spectrum allocation. VoiceStream, he argues, can go it alone and does not have to merge with any of the other major operators in the U.S.

This is, of course, because of the support proffered by DT’s basic fixed business at home. However, loss-making T-Mobile is sharpening up its act. It claimed 23 million mobile customers in Germany as of the end of March 2002, a year-on-year increase of 2 million, and announced that its first-quarter 2002 EBITDA margin (the margin before allowing for anything unpleasant, like interest payments, tax, depreciation, or amortization), was a shade off 41 percent -- 14 percent higher than in 1Q01. This was, the company said, because T-Mobile’s average acquisition cost per subscriber was just €96. More importantly, T-Mobile stumped up €172 for each contract customer, but only €32 for each prepayer.

The only real threat to the T-Mobile’s quasi-monopoly at home, Vodafone Group PLC, reported a customer base of 21.4 million in Germany as of the end of March this year -- nearly 400,000 less than the January 2002 figure. There might have been some average revenue per user (ARPU) erosion at Vodafone in Germany, but the company did not break out Q1 figures. However, broadly speaking, T-Mobile and Vodafone are neck and neck with a blended ARPU of around €25. Vodafone is ahead only on its German EBTIDA margin. This is around 45 percent, Sels said. He pointed out that both companies benefit greatly from economies of scale, which is one of the reasons why both are a real mobile force to be reckoned with.

As for the remainder of the German market, Sels believes that Telefonica's mobile unit in Germany, Quam, which has a UMTS license but no real customer base, is "likely to withdraw" from the game. When it comes to Mobilcom AG, another UMTS bridgehead into Germany, Sels says "it is not clear what France Telecom will do. They could close it down, or minimize capex, or they could merge with another player -– with the last option the most likely."

Longer-term, Sels believes that only three players will survive in the German market. As things stand, it looks like these will belong to DT, Vodafone, and KPN Mobile (E-Plus).

Despite the future prospects for mobile, what spooked Investors today was the fall in pre-tax earnings in the core of DT’s business: the German fixed-line division, T-Com. These were down by nearly half to €694 million, compared with the year-ago quarter. This is indeed bad news for a company that is shackled to €67.2 billion of debt with a delightful little annual interest bill of around €4 billion.

However, it's not all bad news. DT has the German government as its largest single backer (43% of the stock, all told). The market suspects that a rights issue (when investors are invited to subscribe to new shares at a set price), backed by the German state, will haul DT out of the worst of the debt quagmire. Analysts have also argued that it could usefully sell off its Asian assets.

The results knocked DT's share price down 4.5% to €12.5 in mid-afternoon trading in Frankfurt. This figure was actually the share price coming round and sitting back up again after the initial dive to €12.20, DT’s lowest-ever share price.

— Ouida Taaffe, special to Unstrung
http://www.unstrung.com