Will the stock soon break the €20 mark?

Hamburg Telekom CFO Christian Illek was able to sleep on July 13. After the supervisory board also approved early in the evening, one of the biggest deals in the group’s history was a foregone conclusion: Financial investors Brookfield and Digital Bridge would, the next day, buy a majority stake (51%) in Deutsche Telekom’s radio tower business.

The portfolio of more than 40,000 poles, in which Telekom itself and other mobile service providers lease space for their antennas, amounted to 17.5 billion euros as part of the deal. This was slightly less than investors had expected in the meantime. But Illek can still look forward to €10.7 billion in cash, which should flow into his accounts at the end of the year – unless antitrust authorities raise concerns.

Telekom shareholders can also be satisfied. Because the group is gaining wiggle room by selling the tower. Thanks to the back door, he still has the opportunity to regain control of this insignificant part of his infrastructure in the future. The arrow can soon cross a psychologically significant threshold.

In the days of the deal, the paper fluctuated relatively unaffected by the already high price of 19.20 euros, considering the evolution of prices in the recent past. Market experts have shown the sale, however, what potential can remain in T-Share – provided that profits eventually increase.

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Telekom is currently worth about €90 billion on the stock exchange. Only Linde and SAP score higher in the German leading Dax index.

T-Share has developed well above the average in the past twelve months and has overtaken Dax and European competitors in communications. The paper has gained about 12 percent since the start of the year, while the benchmark has lost about 16 percent. The European Industry Index is about 2% higher.

Big bets, high hopes

A team led by US board member Thorsten Langheim, who does the group’s large business, haggled over the towers for several months and ultimately favored an offer with a relatively high degree of flexibility and a high cash component.

Telekom is counting on the new money. The board of directors around its boss, Timothy Hotgs, has made several expensive bets in recent years, the execution of which continues to consume cash.

Another consequence: Under Höttges, the group’s indebtedness rose to unprecedented levels. In the first quarter of 2022, net debt rose again by five per cent to more than 135 billion euros compared to the same period last year.

Telekom spent a lot of money, especially in the USA. Höttges has not yet reached his goal there. Together with Dealmaker Langheim, wants to increase Telekom’s stake in the successful subsidiary T-Mobile-US from the current 48.4 percent to 50.1 percent. Analysts at Deutsche Bank currently estimate the costs of the move at around seven billion euros.

Telekom is benefiting from a deal with Japan’s Softbank starting in 2021, which gives Bonn access to 44.9 million T-Mobile shares at a fixed price of $101 as part of a capital increase. Today, the US subsidiary’s notes are trading on Wall Street at more than $140.

In addition, there are billions more that the head of Telekom will have to invest in the expansion of optical fibers and portable radio frequencies. Höttges needs additional capacity to continue growing in the future. Another auction of precious radio spectrum began in the United States on Friday. In an auction in January, T-Mobile received rumors of about three billion US dollars.

>> Read also: Deutsche Telekom is preparing to say goodbye to the head of Höttges – and it looks like it has a new solution

The hope is that the American bet in particular will pay off in the long run. Cash flow should continue to increase and allow higher transfers to Bonn. From there, some analysts hope a portion of the money will then flow to shareholders in the medium term. In the short term, Telekom will benefit from T-Mobile’s share buyback program that is set to begin later this year.

So far, things are largely going according to plan in Bellevue near Seattle, the headquarters of T-Mobile Group. The former low-cost attacker can still announce record numbers. While competitors AT&T and Verizon recently had to correct their forecasts lower, T-Mobile President Mike Seifert announced more sales successes when presenting the quarterly numbers last week. It now assumes customer growth of more than six million in the current year.

The downside of aggressive strategy: Several IT security scandals and union lawsuits. T-Mobile has yet to prove its ability to handle the most serious business with business customers.

Sprint Wet Vault

Recession remains one of the risks, which is already looming in the United States and Europe. Telecom groups have traditionally been less affected by similar setbacks than other sectors.

In light of Telekom’s difficult financial situation, it is now easy to understand why they would prefer to trade their radio towers for cash in the end. A few months ago, the sale seemed likely to be European mast market leader Selnex, which wanted to pay in Bonn with its own stock rather than cash.

Because Höttges projects lead commitments, which have skyrocketed, particularly in the context of the merger of T-Mobile US and its former rival Sprint. Number four in the US mobile communications market was considered highly indebted and uncompetitive in the long run.

Sprint’s wet basement may also cause surprises in the future. For example, because temporary integration costs were higher than expected, T-Mobile had to post a net loss last quarter. On the other hand, Seifert now expects more synergies.

Telekom Illek’s chief financial officer has promised to reduce the group’s record debt by the end of 2024 at the latest. It’s currently well above the target lane they set themselves, which would allow for a maximum of 2.75 times the adjusted annual profit. A portion of the tower’s revenue should also flow to reduce liabilities. In corporate circles there is talk of about five billion euros.

Telekom shares convince investors

Investment banks remain bullish: 26 of the 28 analysts monitoring the paper, according to Bloomberg Financial Service, recommend the stock. Deutsche Bank analyst Robert Grindel even gave her €26.50.

In Tokyo too, people believe in the Telekom team. Softbank President Masayoshi Son paid 20 euros for new T-Shares shares as part of a capital increase eleven months ago. That was a good twelve percent premium over the level at the time.

In Bonn, the number 20 is considered the magic sound barrier. It has been more than 20 years since paper has been traded at this price. If the €20 billion share buyback program in the US succeeds and the continued increase in profits, a breakout could happen soon.

The Funkturm deal gave the optimists additional hope as it revealed the huge discount Telekom shares are trading at. US and mast works, separately, are currently being added to more than the entire range – despite the relatively high price tag of the T-Share. Höttges and his team now have to prove to the market that the whole has at least the same value as its parts.

more: Telekom sells radio towers – this is how the deal of 17.5 billion

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