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Exclusive: Deutsche Telekom seeks investors to finance Internet reform in Germany

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Exclusive: Deutsche Telekom seeks investors to finance Internet reform in Germany
© Reuters. FILE PHOTO: A man walks past the Deutsche Telekom AG logo at the headquarters of the German telecoms giant in Bonn, Germany, on Feb. 19, 2019. REUTERS / Wolfgang Rattay / File photo

By Arno Schuetze, Nadine Schimroszik and Pamela Barbaglia

FRANKFURT (Reuters) – Deutsche Telekom (OTC 🙂 is offering investors stakes in a company it is setting up to overhaul Germany’s internet cables to help pay the bill for much-needed network modernization, said three people familiar with the case.

The deal is part of a German bid to catch up with other European countries like Spain, which has surpassed Europe’s industrial powerhouse by laying high-tech fiberglass cables, while Germany is mostly stuck with outdated lines.

Deutsche Telekom, Germany’s leading telecommunications company, has come under increasing pressure to act quickly as the coronavirus pandemic has forced more people to work from home and rely on fast and stable internet connections. .

Sources told Reuters that Deutsche Telecom and its adviser German bank (DE 🙂 are targeting investors such as Dutch funds APG and PGGM and Canada’s Brookfield and CDPQ, as well as sovereign wealth funds.

Deutsche Telekom’s initial plan is to extend fiber cables to 4 million homes and investors will be offered stakes equal to up to half of the project’s equity capital, the sources said. More network extensions are likely to take place.

The German company is following the strategy adopted by rivals, such as Spain’s Telefónica (NYSE :), which have reached similar agreements with investors to help pay for network upgrades.

Deutsche Telekom, Deutsche Bank and potential bidders declined to comment.

At the same time, the German telecommunications giant is starting the sale of its T-Mobile Holland business to reduce its debt and free up cash for infrastructure investments.

FOREIGN INVESTORS

Deutsche Telekom is lagging behind when it comes to fiber, opting for improved copper cables to provide internet connections and only switched to focus on faster fiber cables in 2019.

His move is part of a trend among German companies to turn to foreign investors to finance parts of the infrastructure that keeps the wheels of industry moving, such as energy.

The 50Hertz power grid, for example, is now largely owned by Belgium’s Elia, while gas-fired power company Open Grid Europe is partly owned by Australian investor Macquarie.

However, China’s investment is viewed with skepticism. When China’s State Grid wanted to participate in 50Hertz in 2018, the German state lender KfW blocked the move.

Fiber networks are typically financed with 30% equity and 70% debt, and Deutsche Telekom is looking for investors to contribute half of the capital and provide the remainder.

Telefónica reached an agreement in October 2020 with the German insurer Allianz (DE 🙂 to develop a fiber optic network in Germany for 2.2 million homes in a project valued at 5 billion euros (6.1 billion dollars).

Assuming a similar valuation, Deutsche Telekom’s project to supply some 4 million households would be worth about € 10 billion, meaning that investors would have to contribute € 1.5 billion, or half 30% of the capital.

On his capital markets day in May, Deutsche Telekom Chief Executive Tim Hoettges underscored the company’s commitment to accelerating fiber rollout in Germany, taking it from 600,000 households last year to 2.5 million in 2024.

He said the company plans to invest 2.5 billion euros a year in fiber infrastructure.

DUTCH MOBILE SALE

Deutsche Telekom’s plan would still leave it behind countries like Spain and Sweden, where more than 60% of households already get their Internet through fiber cables. In Germany, only 5% of households have fiber, slightly lower than in Italy.

Deutsche Telekom executive Dominique Leroy has said his goal is to reach 10 million homes with fiber by the end of 2024 and that he will seek partnerships where it makes sense.

While Deutsche Telekom is preparing to invest billions, it also faces a large bill to exercise options to increase its stake in T-Mobile US to more than 50% from 43%.

However, it already has 130 billion euros of debt and is now selling businesses to reduce the pile.

First in line is its subsidiary T-Mobile Netherlands, which is estimated to be worth up to € 5 billion. The Dutch mobile business has 6.8 million customers and its sales last year reached 1.9 billion euros.

Adviser to Deutsche Telekom on the deal, Morgan stanley (NYSE 🙂 sent the first information packets to potential bidders requesting bids by the end of July, people familiar with the process said.

Suitors, including takeover groups KKR, EQT (NYSE 🙂 and Warburg Pincus, are expected to participate, as is French telecoms businessman Xavier Niel, the people said.

Warburg Pincus, who employs former Deutsche Telekom CEO Rene Obermann, came close to buying the company in 2015.

Morgan Stanley and potential bidders declined to comment.

Once the sale is out of the way, Deutsche Telekom could look to sell its telecommunications tower division, the people said, adding that while talks are underway with the banks, no decision has been made.

($ 1 = 0.8248 euros)

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