Deutsche Telekom to continue its international expansion

Deutsche Telekom AG, Europe’s largest phone company, aims to continue growing internationally after acquiring a stake in Greece’s Hellenic Telecommunications Organization (OTE) «In 2000 we made less than 20 percent of our total revenue abroad,» Chief Executive Officer Rene Obermann said yesterday in front of about 6,500 shareholders at the company’s annual shareholder meeting in Cologne. «In a few years the portion we generate outside of Germany could account for two-thirds or more.» Obermann seeks growth by acquisitions after forecasting in March that German fixed-line profit will fall and as the weak dollar decreases revenue from the US business. Under a deal approved by the Greek government on Wednesday, Greece and Deutsche Telekom will each hold 25 percent plus one share of OTE. After consolidating OTE, next year, Deutsche Telekom will generate about 60 percent of its revenue abroad, Chief Financial Officer Karl-Gerhard Eick said in an interview. «OTE offers a growth perspective for Deutsche Telekom at manageable expenses,» said Frank Rothauge, a Frankfurt-based analyst at Sal. Oppenheim jr. & Cie. with a «buy» recommendation on the stock. «Deutsche Telekom has achieved its goal to consolidate OTE and that’s positive.» Deutsche Telekom will pay Greece 442 million euros ($683 million) for a 3 percent stake in Hellenic Telecom. Greece owns 28 percent of OTE. Deutsche Telekom paid a «reasonable» price to strengthen its position in Central and Eastern Europe, Rob Goyens, a Brussels-based analyst at Dexia SA, wrote in a note yesterday. (Bloomberg) Fitch notes Greek acquisition will secure DT’s entry into new regional markets Fitch Ratings yesterday affirmed in a note Deutsche Telekom’s Long-term Issuer Default rating (IDR) at A- (A minus) and removed it from Rating Watch Negative (RWN). A Negative Outlook was assigned. DT’s Short-term IDR is affirmed at F2. The rating action follows DT’s announcement of the terms of its acquisition of a stake in Greece’s OTE telecom (BBB/Outlook Stable). In affirming the ratings, Fitch notes that the transaction should not lead to an increase in DT’s net leverage, as the acquisition will be made in several phases. This is despite Fitch’s decision not to initially give DT credit for EBITDA generated at OTE. However, the agency will also not include OTE’s debt in DT’s metric calculations. DT remains strongly free cash flow-generative, which allows it to undertake moderate-sized acquisitions without negatively impacting its financial flexibility. In addition, Fitch notes that this strategic acquisition will secure DT’s entry into new regional markets adjacent to its already established geographical franchise and improve its growth profile. As the European telecom industry is entering a new wave of consolidation, OTE is likely to be a good strategic fit for DT in the long run. The Negative Outlook reflects continuing pricing and market share pressures in the domestic market, Fitch said. Although the 25 percent plus one share and management control should allow DT to consolidate OTE in its financial results, Fitch assumes that cash flows at OTE will not be available to support other parts of the group through intercompany loans while dividend leakage is considerable. Under its methodology the agency will therefore not give DT any credit for EBITDA generated at OTE; however, it will not include OTE’s debt into DT’s total liabilities either.