Deutsche Telekom eyes QWest

Ron Sommer wants to make a deal

Shares in German giant Deutsche Telekom and US telecoms shooting star QWest have surged following reports that the two firms are in merger talks.

The deal would give QWest a partner with very deep pockets and a thriving internet business, while the German firm could finally make a breakthrough on international markets, after a string of failed deals.

Deutsche Telekom is one of Europe's largest companies, with a stock market value of about $260bn.

QWest, meanwhile has turned itself from a small firm with a few broadband cable assets into one of the big players on the US market, and is currently hammering out the details of a merger with US West, one of the so-called Baby Bell phone companies.

Holger Grawe, telecoms analyst with WestLB Panmure in Duesseldorf said: "A deal [with QWest] is likely within one or two weeks."

Market rumours suggest another potential Telekom target, Global Crossing, which is also a broadband cable start-up. However, a source close to the company was quoted as saying that "there have been talks off and on in the past, but there's absolutely nothing going on at the moment".

Buying power

Deutsche Telekom has seen its share price soar by more than 50% since the start of the year, giving it enormous leverage in its hunt for partners.

The former state telecoms monopoly has seen most of its international ambitions thwarted. Its Global One alliance with France Telecom and US long-distance operator Sprint has fallen apart, and the plans to merge with Telecom Italia were thwarted when Olivetti won a hotly fought take-over battle.

So far the firm has struck only two successful deals, the take-over of UK mobile phone provider One2One and a share swap to acquire Club Internet, France's second largest online service.

Deutsche Telekom's mainstay is its stranglehold on the German local call market. However, profit margins are under pressure as rivals have managed to grab a large share of the market for long-distance phone calls.

On the mobile phone market, Telekom is Germany's number two, after Mannesmann, which has just been taken over by Vodafone Airtouch.

Ron Sommer wants a deal

Nonetheless, Deutsche's boss Ron Sommer is still in a great negotiating position. Its greatest asset is T-Online, Europe's largest internet service provider with more than 4.2 million subscribers.

T-Online is scheduled to be partially floated on the share market in April, and could jump to a market valuation of $40bn.

This stock is a great currency to finance Mr Sommer's ambitious expansion plans. Observers say that he has only a few more months to break out of the confines of the German market or see Telekom outmanoeuvred by its global rivals.

A QWest merger would allow Telekom into the US long-distance market and give it access into a rapidly expanding and very lucrative corporate communications business.

QWest's merger trouble

QWest would have something to gain as well. Linking up with Deutsche Telekom would help its expansion plans in Europe.

However, the rumours that it is in talks with Mr Sommer has already put great strains on its planned merger with US West.

The Baby Bell's executives were told only recently about the contacts with the Germans.

In a letter sent to Qwest's general counsel, US West said "we are extremely concerned that these discussions are ongoing with no information being provided to us. Such discussions would appear to be a clear violation of our merger agreement."

Analysts have suggested that Deutsche Telekom could now consume the merger in two stages by bidding separately for both firms, first taking over QWest and then moving in on US West.