Telekom Goes Shopping: Good Business or Bad Habit?

News that Deutsche Telekom has offered €1 billion ($1.1 billion) to win control of Polish mobile phone operator PTC could either be the first real sign that the German telecommunications giant is looking to expand after two years of debt repayment or that the company is slipping back into bad habits.

Germany’s telecoms giant Deutsche Telekom announced on Monday that it had made the offer to buy the 51 per cent of PTC that it does not already own from the Polish utility Elektrim and French group Vivendi Universal. If the deal goes through, and experts believe it will as both Elektrim and Vivendi invited the German firm to make the offer, it will be Telekom’s major acquisition in more than two years after a period of poorly executed and overly expensive investments.

On the one hand, the 100 percent holding in PTC would give Deutsche Telekom control of a key group in a fast-developing market. As Telekom is well aware, mobile operations in Eastern Europe are booming. Current affiliates such as Matav in Hungary and Slovakia’s Slovenske Telekomunikacie both control market leading mobile firms in their respective countries under the watchful eye of Telekom’s own mobile arm, T-Mobile.

PTC payment to begin next year

It could be a good bit of business for Europe’s largest telecoms provider. Chief Financial Officer Karl-Gerhard Eick (picture, right) has said Deutsche Telekom remains on track to reach its target of reducing its debt to around €50 billion by the end of the year. Payment for PTC would be made in the first three months of 2004, so as to not jeopardize that goal.

If the increase in mobile network roll-outs continues at the current pace in Poland, Deutsche Telekom could see it add a healthy chunk of profits to its bottom line. It would be a major success for CEO Kai-Uwe Ricke who took over the running of Telekom after the acrimonious departure of free-spending former chief Ron Sommer.

Since his appointment, Ricke has quickly reorganized his management team and has streamlined the structure of the group’s four main components; T-Mobile, T-Com, T-Online and T-Systems. He has since set about implementing his “6+6” debt reduction plan launched in November, within which €6 billion would be generated from free cash flow and a further €6 billion would come from the sale of assets.

Debt reduction plan slowly working

The first positive sign that the plan was working came in the first half of this year when Deutsche Telekom clawed its way out of the red, recording net income of €256 million in its second quarter to June 30, compared to a loss of €2.08 billion a year earlier. It also cut its debt by €8.1billion through its policy of selling non-core assets, such as property.

Much of that success was also attributed to the strong showing of T-Mobile. Revenue leapt 18.9 percent in the second quarter to €5.5 billion with the number of new customers in the United States rising by 1.5 million in the first half to reach 11 million.

T-Mobile now has a total customer base of 61.4 million with overseas revenue now accounting for almost 57 percent of its total. Further investment abroad, therefore, may not be a bad strategy, especially considering the stagnation at home.

"It certainly fits with their strategy – (PTC) is a fast-growing market and the company is profitable," Heike Pauls, a telecoms analyst at the brokerage Chevreux, told Reuters.

A return to over-paying?

So, the PTC deal could well signal recovery and expansion for Deutsche Telekom. But on the other hand it could be a return to the days when the company was notorious for over-paying. Some investors have said the PTC deal looks like good value, but many remain cautious, bearing in mind Telekom's reputation and indulgent spending in previous acquisitions.

"I'm a bit ambivalent," said Christian Doppstadt, a credit fund manager at WestAM. "If you look at the valuation it looks like a good deal. Still, what could give investors a headache is that this could turn out to be a return to old habits."