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Why Deutsche Telekom Might Brexit Too

Deutsche Telekom used to eye the UK telecom market with relish, but it may have lost its appetite at the smell of what’s cooking. Late last week, the German operator was said to be considering a sale of its 12% stake in BT, the UK’s fixed-line incumbent. Currently worth about £4.3 billion ($5.4 billion), that stake was once seen as a potential springboard to a much bigger role in the UK. Yet the recent “Brexit” referendum, which saw UK voters opt to quit the European Union, has made foreign investors grimace. As its priorities change, Deutsche Telekom could decide on a British exit of its own design. (See Brexit: It’s Hard to See an Upside.)

At the time, the deal that made Deutsche Telekom AG (NYSE: DT) a BT shareholder seemed like a smart move. In a £12.5 billion ($15.6 billion, at today’s exchange rate) transaction at the start of this year, BT Group plc(NYSE: BT; London: BTA) took full control of EE , the country’s biggest mobile operator, from Deutsche Telekom and France’s Orange (NYSE: FTE), its joint owners. In a stroke, BT became the dominant force in both fixed and mobile markets, while Deutsche Telekom became BT’s largest single shareholder. (See BT Gets Final Go-Ahead for $17.9B EE Takeover.)

The acquisition augured well. BT was flourishing under the leadership of its dashing CEO Gavin Patterson, whose bold gamble on costly football rights seemed to have paid off for the operator’s fledgling TV business. By adding high-speed mobile offerings to the service mix, BT hoped to attract new customers and give existing subscribers even less reason to look elsewhere.

The strategy dovetailed with Deutsche Telekom’s own approach of developing both fixed and mobile capabilities, and using premium content to lure customers. Moreover, both operators espied enterprise opportunities in the cloud services market, and were investing in all-IP networks to improve efficiency. (See BT, DT Tie-Up Holds All-IP, Cloud Promise.)

All of this held out the possibility of strategic collaboration and joint ventures. There were even suggestions that Deutsche Telekom was preparing the groundwork for a full-blown takeover of BT. Analysts reckoned Deutsche Telekom’s all-IP plans could provide the financial rationale for such a move. By replacing UK-specific technologies with all-IP platforms serving a number of European markets, the operator would be able to fatten its margins while boosting sales. (See All-IP DT Could Drive Euro M&A, Say Analysts.)

Brexit fallout
Yet the prospect of Brexit has clearly made the UK a less promising place to hang out. In the referendum’s wake, consumer spending held up better than many had feared, but most experts still agree that Brexit will hurt the economy, and might even trigger a recession. The pound has fallen by about 18% against the dollar since the vote, driving up the cost of imports and squeezing disposable incomes. Companies are slashing plans for recruitment and investment, data suggests.

It would be foolish to think communications service providers are immune to the pain. The rising cost of imports seems likely to affect BT in one way or another, whether by inflating its own expenses or making life much tougher for its customers. A “hard” Brexit, to which the current government appears committed, may come with restrictions on immigration, preventing service providers from dipping into the European talent pool as freely as before.

Brexit fears triggered a 14.5% drop in BT’s share price on June 24, the day after the referendum. Since then, shares have lost another 6% in value. While the consumer business marches on, concern has grown about BT’s much publicized pension deficit, which had widened to about £9.5 billion ($11.9 billion) in September from £6.2 billion ($7.7 billion) in June. In the meantime, calls for the break-up of BT into separate retail and access network businesses have only grown louder, despite regulatory resistance to such extreme measures. In any case, the potential “structural separation” of BT is an obvious worry for shareholders. (See BT Clings On to Openreach – Just.)

Source: Light Reading

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