• $18bn in cash flow could be up for grabs, if the deal gamble pays off.
  • To get there, though, will require a difficult restructure of Group liabilities and execution on approval and integration.

Whichever way you look at it, the Sprint-TMUS deal involves a white-knuckle ride for DT.

Recent years’ resurgence at TMUS and malaise at Sprint, combined with the USA’s incredible political changes, have seen the stars somehow align for the Group. It has been able to agree a combination allowing it to – just – maintain control of its American business. It has in this sense become the “King” of its own Kingmaker strategy (although SoftBank may still inherit the crown a few years down the line). How different things might have been had DT been able to sell out to AT&T back in 2011.

There is a major edge to this, though – starting with the uncertainty over regulatory approval and the associated risk of management distraction at TMUS as this battle plays out over the next few months.

Then there is the need for a hugely complicated integration programme to remain on track and not foul up the plan to make New T-Mobile a massive cash generator. Co-parent relations with a bruised SoftBank leadership – and feisty public shareholders – must also be kept on an even keel (see further on). All this comes with the Group already facing questions on spend outlook in Europe.

Money manoeuvring ratchets up pressure on US delivery

There is also an edgy feel to DT’s changing fiscal relationship with TMUS. DT has fashioned a deal that will enable it to reduce direct exposure to the cash demands of its USA business, and the huge capital flow TMUS has been sucking in for spectrum and network infrastructure investments (Deutsche Telekomwatch, #71 and passim).

Having dropped an ambition to make TMUS “self-funding” in 2016, as the NatCo’s revival gathered steam (Deutsche Telekomwatch, #51), DT had built up $17.1bn of financing to TMUS as of 31 March 2018. When the transaction closes, this will be slashed to just $6.6bn, via repayments, and DT plans to eliminate the remaining advance “over time”, as arrangements mature. This could be a major boon to other parts of the Group.

The flipside of this intra-Group debt hand-off is that New T-Mobile will remain consolidated within DT – so the Group is therefore the ultimate ‘owner‘ of New T-Mobile‘s liabilities, including the internal debt that DT is foisting on the NatCo. The Group indicated that New T-Mobile would start life with an eyewatering total debt of $75bn-$77bn.

It assured that the newly-merged operator would quickly seek to de-lever. “We target a balanced debt structure and an investment grade rating post-integration”, said DT CFO Thomas Dannenfeldt.

Nonetheless, this interim period will bring additional pressure on Group finances. DT itself has already seen debt go north of EUR50bn in its last fiscal year, and after the Sprint-TMUS announcement, the Group indicated that the deal would push it through the upper limit of its 2.0-2.5 times net leverage target range.

Credit ratings agencies Moody’s and Standard & Poor’s downgraded DT’s outlook following the merger announcement. This would not have been the case had DT acceded to SoftBank on creation of a joint venture, rather than retaining control.

The situation puts even more importance on success in post-merger execution and New T-Mobile‘s planned gamble on 5G at a time when some are questioning the financial case for investment in the technology. DT sought to stress New T-Mobile‘s growing capacity for “strong free cash flow generation”, saying this will help bring liabilities back in range by FY21. Repayments of the TMUS lending will also ease the situation somewhat. DT framed this process as “only a short departure from our comfort zone”.

Can DT find the $18bn pot at the end of the rainbow?

  • The vaulting ambition of the Sprint deal, and cash required to fulfil it, appears to have instigated a subtle – but significant – change in how the American business is now viewed within DT’s leadership. This is something that could have major implications for NatCos on the other side of the Atlantic and Group strategy in general.
  • While TMUS has for some time been the Group’s largest business and main growth driver, it has remained in some ways a side-investment, and outside the fold of DT’s Leading European Telco mission. Since the Sprint deal’s announcement, however, DT is now trumpeting its “Trans-Atlantic Platform”, suggesting New T-Mobile‘s fortunes, and those of its European businesses, are now more closely intertwined and at least on an equal footing.
  • This is a major turnaround for a DT that evidently took time to accept the USA’s rise above Europe in terms of investment appeal (Deutsche Telekomwatch, #68). It also provides a major wake-up call to European regulators that its largest regional telco is shifting focus elsewhere.
  • Höttges painted the new footing as a position of strength, noting that “90% of our businesses are in ‘AAA’ markets” and twisting the knife into rivals such as Telefónica, Telecom Italia, and Vodafone over their emerging markets exposure. “Think about other telcos who have, sometimes stranded, investments or very complex investments in South America, Africa, or other areas”, he said. He also highlighted the USA as the “breeding house” for internet giants such as Amazon, Facebook, and Google, and DT’s desire to be “part of the system where digitisation networks are needed”.
  • Nonetheless, with US interests being overhauled, and businesses in Europe still to regain full form, things will be on edge for DT for the foreseeable future. If this period can be ridden out, DT has grand hopes for payback on its investment in New T-Mobile. Within its slide deck on the transaction was a suggestion that the US operator could be able to generate $16bn-$18bn in annual free cash flow (before capex) once the integration programme is completed. Even despite DT’s minority position, this could be a transformative source of cash for the Group to spend on further expanding its business.
  • With the taps starting to flow, this would be the point when the “fun starts”, said Dannenfeldt – but it could also be a time when tensions with SoftBank really begin to come to the fore, and DT may once again be forced to make a decision on its commitment to the USA.

Image: Ken Lane / Flicker CC BY-NC 2.0.

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Contents

EXECUTIVE BRIEF

Q1 FY18

Management update

DT readies pitch for “Trans-Atlantic platform” [p6]

  • DT turns eyes beyond Europe, self-defines as “Trans-Atlantic”
  • Table 1: Deutsche Telekom strategy, FY14 versus FY17
  • Money pressures to weigh on strategic update; TMUS cost hand-off up in air
  • Table 2: Deutsche Telekom, financial summary, Q1 FY18

Headline data: an untimely fall off the boil [p8]

  • Out in the regions: Europe slowly regaining mojo, but drag has hurt DT

GROUP

M&A

Group begins push to make New T-Mobile dream a reality [p11]

  • Table 3: DT and TMUS advisory team
  • Figure 1: Revenue comparison, New T-Mobile, versus US majors, year to 31 December 2017
  • Figure 2: New T-Mobile ownership structure

Sprint-TMUS: out of giants’ shadow, and room to grow [p15]

  • A power-play across the Atlantic, too

Buckle-up: DT is testing the limits [p16]

  • Figure 3: Revenue comparison, Deutsche Telekom plus Sprint, versus US majors, year to 31 December 2017
  • Money manoeuvring ratchets up pressure on US delivery
  • Table 4: DT funding support to TMUS, 31 March 2018
  • Can DT find the $18bn pot at the end of the rainbow?
  • Table 5: Projected New T-Mobile free cash flow

Masayoshi Son: Can DT crack the enigma? [p19]

  • Embarrassment and shame

The approval effort: ingratiation mode selected [p21]

  • A few fences to mend
  • Table 6: New T-Mobile cost synergy ambitions

Four-year integration programme: main elements [p22]

The New T-Mobile network masterplan [p23]

  • 5G: this is how we do it
  • Figure 4: Nationwide split of available mmWave spectrum (%)
  • 5G FWA… hmm, perhaps not a bad idea after all

Huge partner opportunity for 5G thrust and IT meld [p27]

  • Ecosystem reaction
  • Table 7: Sprint vendor/partner agreements, where publicised, 2008-2018

Euro tower power: Cellnex-DT tower linkup ‘expands to Netherlands’ [p30]

  • Time for phase two
  • All in the execution

ngena continues to share network love [p32]

  • Building the future
  • Table 8: ngena ecosystem, May 2018
  • ngena: “like-minded” carriers sought; stuffy traditionalists need not apply

Legal and regulatory

DT joins chorus of criticism against EU digital reforms [p35]

  • Cracking the Code
  • Can’t ETNO satisfaction
  • Table 9: People movement highlights

Technology & Innovation

DT’s IP migration initiative hits two-year delay [p39]

  • Figure 5: Deutsche Telekom, European IP migration progress, FY15-FY17 (% of lines)
  • Being IP doesn’t yet square
  • Bumps in the road
  • Copper retirement now on agenda

DT welcomes prospect of fronthaul RAN disruption [p41]

  • Revamping the RAN
  • Katti remarks
  • A game of ‘Os’ and ‘Xs’

DT’s immmr rules out full UK launch [p43]

  • World domination takes back seat

GERMANY

Deals

Pressure on rise as Vodafone-Unitymedia deal agreed [p46]

  • Housing associations shun TDE at front door
  • Vodafone, Liberty focus fire on DT
  • Höttges risks being cast as the broadband bogeyman

Network

TDE deploys 5G antennae as standard in Berlin [p48]

  • BuyIn making a mark in Group 5G buying
  • Big in Berlin
  • 5G pieces falling into place?
  • Beyond Germany

EUROPE

Croatia

Hrvatski Telekom joins NB-IoT gang [p52]

  • Table 10: NB-IoT rollouts to date across the DT footprint
  • NB-IoT rollout gathering steam

USA

Legal and regulatory

TMUS lands huge fine over rural call dodge [p56]

Network

TMUS beefs up network with mid-band muscle [p57]

  • Mid-band momentum
  • Ray bands

FURTHER READING

INDEX

Index

Symbols

3rd Generation Partnership Project (3GPP) 48

A

AAA 18

Africa 18, 32, 37

– South Africa 32

Alcatel-Lucent 29

Alibaba Group Holding Ltd 20

Amdocs 27, 29, 43

American Tower Corp. 27

Americas

– Brazil 37

– Canada 34, 36, 50

– South America 18

– United States of America (USA) 6, 7, 9, 11, 15, 16, 17, 18, 20, 21, 24, 25, 27, 43, 44, 50, 53, 55, 56

– – Department of Justice (DoJ) 21, 56

– – Federal Communications Commission (FCC) 21, 24, 56

– – Government 21

– – States

– – – Kansas 22

– – – New York 21

– – – Washington 21, 22, 57

– – – Wisconsin 56

Apple 9

Aricent Inc. 43

Asia-Pacific 33, 34, 37, 42, 50

– Australia 50

– China 20, 21, 32, 34, 41, 48, 52

– India 28, 37

– Japan 19, 32, 34

– Singapore 34

AT&T 11, 15, 16, 21, 22, 23, 24, 25, 50, 56, 58

B

Bharti Group 37

– Bharti Airtel 37

Boingo Wireless 28, 29

Boku 29

BOKU Inc. 29

Bridge Alliance 33

Broadcom 21

BT Group 13, 20, 35, 42, 47

– EE 13, 37

Bundesliga 48

C

Cellnex Telecom 30

– Swiss Towers 30

CenturyLink Inc. 32

CGI Group Inc. 37

China Mobile 41

Ciena Corp. 29, 43

Cisco Systems 29, 32, 34, 43

Cleary Gottlieb Steen & Hamilton LLP 11

Colt Group 37

Comarch SA 32, 34

Comcast Corp. 15

– NBCUniversal, LLC

– – CNBC 21

Committee on Foreign Investment in the United States 21

CommScope Inc. 29

Computacenter

– Allnet 58

Crown Castle International Corp. (CCI) 27

CSG Systems 28

D

Deutsche Bank 11

Deutsche Telekom 6, 7, 8, 9, 11, 12, 13, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 27, 28, 30, 31, 32, 33, 34, 35, 36, 37, 39, 40, 41, 42, 43, 44, 46, 47, 48, 49, 50, 52, 53, 56, 57, 58

– Deutsche Telekom Capital Partners 15, 17, 19, 30

– – DocuSign (see separate) 15

– – Fireglass (see separate) 17

– – Mojio (see separate) 50

– – Morphisec (see separate) 17

– – Next Generation Enterprise Network Alliance (ngena) 32, 33, 34

– – Swiss Towers (see separate) 30

– Europe

– – Austria 9, 37, 49, 50, 52, 53

– – Croatia (Hrvatski Telekom) 52, 53

– – Czech Republic 9, 48, 53

– – Greece (see OTE) 9, 42, 53

– – Hungary (see Magyar Telekom) 9, 53

– – Netherlands 12, 30, 36, 39, 53

– – Poland (Polska Telefonia Cyfrowa/PTC) 53

– – Slovakia (Slovak Telekom/T-Mobile) 37, 44, 53

– – UK (EE) 13, 37

– Executives

– – Abolhassan, Ferri 37

– – Al Saleh, Adel 9

– – Budwilowitz, Frank 37

– – Dannenfeldt, Thomas 6, 17, 31, 35, 39, 50

– – Gopalan, Srini 9, 37

– – Höttges, Timotheus 6, 11, 13, 19, 30, 35, 46

– – In der Rieden, Tom 37

– – Jacobfeuerborn, Bruno 31

– – Lange, Peter 37

– – Lauterbach, Thomas 37

– – Legere, John 9, 11

– – Manepalli, Surya 37

– – Melchor, Erik 37

– – Nemat, Claudia 44, 48, 50

– – Pruchnow, Johannes 41, 47

– – Ray, Neville 13, 57

– – Salacki, Andreas 37

– – Sievert, Mike 9, 13, 23

– – Singh Ahluwalia, Kanwardeep 37

– Germany 6, 9, 30, 37, 40, 44, 46, 47, 48, 49, 50, 53

– Investments

– – Magyar Telekom (see separate) 9, 53

– – OTE (see separate) 52

– Product and Innovation

– – hubraum 53

– Products and services

– – Entertain 48

– – immmr 43, 44

– – QIVICON 42

– – StreamOn 9

– – T-Mobile TV 25

– Systems Solutions 8, 9

– – T-Systems 6, 15, 32, 37

– – – South Africa 32

– – – Telekom Security 37

– T-Mobile International 37

– USA 6, 7, 8, 9, 11, 12, 13, 15, 16, 17, 18, 20, 21, 22, 23, 24, 25, 27, 28, 37, 44, 53, 56, 57, 58

– – Un-carrier 13

Deutsche Telekom Capital Partners 15, 17, 30

DLA 11

DocuSign 15

E

eBay

– PayPal 17

Emblaze Group

– European Telecom 36

EMC

– VMware 29

Ericsson 29, 35, 37, 42, 48, 49

Europe

– Austria 12, 37, 49, 52, 53

– Belgium 39

– Croatia 52, 53

– Czech Republic 46, 53

– Eastern Europe 37

– Germany 6, 7, 8, 9, 11, 21, 30, 31, 32, 34, 37, 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 50, 53

– – Bundesnetzagentur für Elektrizität, Gas, Telekommunikation, Post und Eisenbahnen (BNetzA, RegTP, FNA, or German Federal Network Agency) 46, 49

– Greece 52, 53

– Hungary 46, 50, 53

– Ireland 43

– Italy 32, 34, 42

– Netherlands 12, 30, 33, 36, 37, 39, 53

– Poland 53

– Romania 9, 46

– Slovakia 37, 50, 53

– Spain 30, 32, 34

– Sweden 48

– Switzerland 30

– United Kingdom (UK) 13, 32, 33, 34, 37, 43, 47

European Telecommunications Network Operators’ Association (ETNO) 35, 36

European Union 35, 36, 52

– European Commission 12, 35

– European Parliament 35

F

Facebook 42

– Telecom Infra Project 42

Fireglass 17

Flash Private Mobile Networks 39

France Télécom 35

– Orange 16, 35, 37, 41, 49

– – UK (see EE, DT) 13, 37

Fujitsu 43

G

Gemalto NV 29

Gilat Satellite Networks Ltd 29

Goldman Sachs 11

GSM Association

– Mobile World Congress 44, 46, 50

GSM Association (GSMA) 56

H

Hewlett-Packard 17

Hrvatski Telekom (see DT, Croatia) 52, 53

Huawei Technologies 48, 49, 52

I

IBM 29

IDEMIA 29

Ingram Micro 36

Inmarsat 32

Intel 43

Interxion 29

ISS Group 31

J

JPMorgan Chase 56

Juniper Networks 29

K

KPN 12, 32, 33

L

Liberty Global

– UPC Austria 12

Liberty Global Inc. 46

– Unitymedia GmbH 37, 46, 47

– UPC Broadband 12

– – Germany (Unitymedia) 37, 46, 47

LivePerson 28

Lookout, Inc. 29

M

Magyar Telekom (see DT) 9, 53

Market segments

– Machine-to-machine (M2M) 29

– Mobile virtual network operator (MVNO) 39, 43, 44

– Multinational corporations (MNCs) 33

– Over-the-top (OTT) 43

– Value-added services (VAS) 29

Mavenir Systems 29, 43

McGraw-Hill Companies, The

– Standard & Poor’s (S&P) 7, 17

Metaswitch Networks 29

MetroPCS Communications Inc. 22, 58

– Carter, Braxton 13, 57

Microsoft 19, 29, 37

Middle East 32, 37

– Saudi Arabia 19

Mojio 50

Morgan Stanley 11

Morphisec 17

MTN 32, 33

N

NEC 43

Nokia 29, 43, 48, 49

O

Openwave Systems 29

Oracle 37

OTE (Hellenic Telecom. Org. SA, see DT) 52

– Cosmote 9, 42, 52, 53

– – Greece 9, 42, 53

P

PCCW 32

PCTEL 28

Peoplesoft 37

Providence Equity Partners

– KDG Holding GmbH (Kabel Deutschland) 46

Q

Qualcomm 21, 29

R

Red Hat 29

Reliance-Anil Dhirubhai Ambani Group

– Reliance Communications (RCom) 6, 32

S

SafeBreach 17

Samsung 29, 37, 43

SAP 37

Schellenberg 42

Sequoia Capital 17

SK Telecom 32, 43

Slovak Telekom (see DT, Slovakia) 37, 44, 53

Smith Micro Software 28, 29

SOFTBANK CORP. 11, 12, 13, 16, 17, 19, 20, 21

– Son, Masayoshi 13, 19

Sprint Corporation 6, 7, 11, 12, 13, 15, 16, 17, 18, 20, 21, 22, 23, 24, 25, 27, 28, 29, 56, 58

– Boost Mobile 22

Strabag International 31

Sunrise 30

T

Technology

– 2.5G 23, 24

– 2G 23, 24, 48

– – GSM 56

– 3G 48

– – Evolved HSPA (HSPA+/I-HSPA)

– – – MIMO 24, 42

– 4G 23, 24, 39, 41, 42, 48

– – Long Term Evolution (LTE) 24, 28, 29, 48, 57, 58

– 5G 6, 7, 13, 17, 21, 23, 24, 25, 27, 28, 30, 41, 42, 48, 49, 50, 58

– Billing 29

– BSS 28, 32, 34

– CRM 29

– Ethernet 32

– Fibre 6, 7, 25, 35, 41, 42, 47, 50

– IMS 29

– IP 6, 7, 39, 40, 41, 42

– IPTV 25, 48

– M2M 29

– NaaS 34

– Narrowband Internet of Things (NB-IoT) 52, 53

– NFV 29, 33, 34, 42

– OpenStack 32

– OSS 29, 32, 34, 48

– “Push-to-talk” 39

– RAN 41, 42, 43, 48

– R&D 52

– SDN 33, 34

– SIM 39, 53

– Smartphone 25

– Spectrum 24, 58

– – 700 MHz 58

– – 1900 MHz 23, 57

– – Advanced Wireless Spectrum 57, 58

– WAN 29, 32, 33, 34, 52

– W-LAN 28, 29

Tele2 12, 30

– Netherlands 12, 30

Telecom Italia 18

Telefonica Group 18, 35, 41

– Europe 37

Telekom Austria 32, 33

– Austria

– – A1 32, 33

Telit 29

Telstra 32, 43, 50

Telus 32, 34, 50

Texas Instruments 43

Time Warner 21

Twitter Inc. 20, 21, 57

V

Value-added services 15

Verizon Communications 13, 15, 16, 21, 22, 23, 24, 25, 43, 56, 57, 58

– Verizon Wireless 13, 57, 58

– – McAdam, Lowell 21

Virgin Group

– Virgin Mobile 22

Vodafone 13, 18, 33, 42, 46, 47

– Africa, Middle East, and Asia Pacific Region (AMAP)

– – India 37

– Europe Region

– – Germany 46, 47

Voxbone 43

Z

Zscaler 29

About

About Deutsche Telekomwatch

Report: #73
Published: May 2018
Next report: June 2018
For more information visit: Deutsche Telekomwatch