DT’s share price hinders dreams of consolidation

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Kai-Uwe Ricke, Deutsche Telekom’s chief executive, has spent two weeks on the road trying to persuade institutional investors on both sides of the Atlantic the shares of Europe’s largest telecoms company are undervalued.

This is not a vanity thing. The value of DT shares decide whether Mr Ricke can play a leading role in consolidation of the European telecoms sector.

At the company’s annual meeting this month, Mr Ricke told shareholders: “In Europe and the United States, our industry is undergoing a process of continuing consolidation . . . I can assure you, we intend to play an active role in the process.”

Mr Ricke believes consolidation will take place between Europe’s former state-owned telecoms monopolies. He would like to buy big to become bigger.

Since he became chief executive in 2002, Mr Ricke has cut DT’s debt by more than a third. People close to the company said DT could pay €20bn ($25.5bn) in cash for any acquisition. Last year it considered offering more than €20bn for O2, the British mobile operator, but was trumped by Telefónica of Spain.

DT, with a market capitalisation of €52bn, is mulling possible acquisition targets in the UK, France and Spain, as well as eastern Europe.

But some, such as BT, the British telecoms company, are too big for cash bids. To realise his ambition of playing a leading role in consolidation of the European telecoms sector, Mr Ricke would need cash and paper.

People close to DT said Mr Ricke could not take this route while DT shares were undervalued, partly because unhappy investors would see their stock diluted.

A DT acquisition of BT, which has a market capitalisation of £19bn ($35.5bn), would offer notable synergies. BT is distinguishing itself from its peers by building a business that provides private communications networks and related information technology to multi-nationals.

The business, BT Global Services, contributed 44 per cent of the group’s revenue in 2006. DT has a similar business, called T-Systems, but it is primarily focused on German companies. BT does not have its own mobile business. This could hamper its long-term growth if people increasingly switch from fixed lines to mobiles. DT’s T-Mobile business is anchoring the group’s revenue growth.

BT is no stranger to take- over speculation. For months, private equity firms have been rumoured to be preparing bids, and Sir Christopher Bland, BT’s chairman, joked at the company’s 2006 results this month he was “still awaiting approaches”.

DT declined to comment on possible acquisition targets. BT also declined to comment.

But DT is casting around for ideas to lift its stock price. A month before Mr Ricke’s tour of financial capitals, the German government sold a 4.5 per cent stake in DT to Blackstone, the private equity group, for €2.7bn. Both sides agreed not to sell any DT shares until 2008 at the earliest.

The deal was meant to prove DT shares were so undervalued they could attract Blackstone into taking an unusual minority stake.

But the investment only saw DT’s stock price rise briefly and it has since fallen again below €13. While DT shares have lost 15 per cent in value over the past year, BT shares have gained about 7 per cent. Perhaps for this reason people close to DT said European consolidation could take five years.

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