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EDITIONS
Thursday, 19 April, 2001, 11:25 GMT 12:25 UK
Deutsche Telekom's debt battle
Deutsche Telekom's headquarters
Telekom: Under criminal investigation and battling a 75% share price slide
If Ron Sommer, Deutsche Telekom chief executive, knows anything about football he'll be preparing for bad news.

The amount of times in the past few months company directors have said his management has their full support makes one suspect he must be sacked soon.
Deutsche Telekom chief executive Ron Sommer
Sommer: Voicestream deadline looming

In what might be the kiss of death, Mr Sommer has even received the public backing of no less a figure than Chancellor Gerhard Schroder.

Broadly speaking, the problem for Europe's largest telecoms company is similar to that affecting rivals such as France Telecom and British Telecom:

The share price has collapsed with the bursting of the tech stock bubble worldwide and growing concerns about the health of the world and US economies.

Disgruntled

European telecoms investors have been concerned, in particular, over the huge levels of debt companies have built up acquiring third-generation (3G) mobile phone licences and investing in new mobile, data and internet services.

Having earned respect and praise for the way he reformed a lumbering, bureaucratic monster, guiding it through three public share offerings and delivering strong capital growth, Mr Sommer now has a lot of disgruntled shareholders on his hands.

Telekom shares have lost about three quarters of their value over the past year - a worse performance than either France Telecom or British Telecom.

Click here to see a graph of Deutsche Telekom's share price.

Over-valuation admission

Those who bought the shares last year in the third offering (and still hold them) have seen two thirds of that money melt away on paper.

Shares in T-Online - Europe's largest internet service provider with about eight million subscribers, which Telekom spun off last year but still controls - are also ailing.

Deutsche Telekom
226,000 employees
41bn euros revenue
6bn euros net profit
35 million customers
Europe's biggest ISP with eight million subscribers

Following privatisation, Telekom has faced very tough competition in its domestic fixed-line business.

And, to cap it all, German state prosecutors launched a criminal investigation after it was alleged Telekom had overvalued some of its assets.

In February, the company finally admitted it had over-valued its property portfolio by two billion euros ($1.8bn; 1.2bn) - a factor that cut 20% from profits for 2000.

Allegations of miscalculated profit margins and future revenues have also been made.

Debt reduction

Like its French and UK rivals, Telekom's main aim now is to find ways of reducing debt without destroying shareholder value.

It says it wants to slice 29bn euros off its 56bn euro debt load by the end of this year.

Some measures have already been announced including the sale of a 10% stake in US operator Sprint - estimated to be worth $2bn - and the "aggressive" disposal of property, which might raise up to 2bn euros.
Ron Sommer
Born 1949
Chief executive since 1995
Contract until 2005
Formerly with Nixdorf and chairman of Sony Europe

A securitised bond issue - an innovative idea aimed at reducing the cost of servicing debt - has also been mooted as well as the sale of some cable assets.

However, these measures alone are unlikely to be sufficient.

T-Mobile float in question

A management reshuffle announced on 11 April was all but ignored by the markets.

Analysts say two critical issues loom for Mr Sommer.

The first is what to do about T-Mobile, Telekom's wireless arm.

A flotation had been planned for this year (having already been put off from 2000) and was expected to generate a substantial amount of the cash needed to pay down debt.

But unfavourable market conditions highlighted by the uncomfortable market debut of France Telecom's Orange have caused the company to delay it.

Times of depressed valuations may not be the time for selling prime assets but, so far, Telekom has said little about what it will do and when.

Without a sale of T-Mobile shares, Telekom's debt reduction aims look optimistic, analysts say.

Voicestream threat

The second issue presents a more immediate threat to Mr Sommer.

It concerns the estimated $34bn purchase - which some said was too much - of US long-distance carrier Voicestream.

Under the terms of the deal, Voicestream shareholders will be able to back out or demand a renegotiation if Telekom's share price averages less than 33 euros for seven days within the 15 trading days immediately preceding the completion date.

In practice, this means Telekom has until the end of May to lift its share price 25%.

If it fails to do this, Telekom's shareholders would be unlikely - given market conditions - to countenance any sweetening of the deal.

If the deal collapses, Mr Sommer, who has championed Voicestream as his top priority, is unlikely to survive long, analysts say.

Even if the deal goes through as planned, the prognosis for Mr Sommer is questionable: Many Voicestream shareholders, receiving Telekom stock as payment for their shares, are likely to sell immediately, pushing the German company's share price even lower.

Better off in Europe

Some analysts have urged Telekom to ditch Voicestream whatever happens to the share price before the end of May.

They argue the company would be better off building a more commanding presence in Europe, where it has only acquired 3G mobile phone licences in Germany, the UK (through its ownership of One2One) and the Netherlands.

Prospects for achieving a substantial position in the US market are far more uncertain, they say.

The deal has also aroused concern in the US, with some members of congress arguing the German government's 44% stake in Telekom has implications for both competition and national security.

Concern about the depressed share price, 3G-related costs and the failure in recent years of proposed tie-ups with both France Telecom and Telecom Italia has already taken much of the shine off Mr Sommer's achievements.

Any slip-up over Voicestream would probably be terminal.

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See also:

21 Feb 01 | Business
14 Feb 01 | Business
23 Jan 01 | Business
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