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Deutsche Telekom is confident enough to talk about spending $39 billion

While we have spent long hours criticizing and condemning AT&T’s deal to buy T-Mobile USA, from a point of view of it harming competition in the US

By PETER WHITE

Published: 26 May, 2011

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While we have spent long hours criticizing and condemning AT&T’s deal to buy T-Mobile USA, from a point of view of it harming competition in the US. There remains a critical question for Europe – what will Deutsche Telekom do with all that money – some $39 billion.

A number of European sources including Bloomberg this week reported on a speech given by Ronald Mahler, head of Telekom’s European operations outside Germany in Europe, and he is saying quite openly that at least some of it will be used to dominate European fixed lines.

Many fixed line businesses are either weak or still controlled fully or partially by the local government and are in need of liberalizing. It is already negotiating to buy the remaining half of Slovak Telecom and Mahler could just as easily take a peek at assets in Austria, Poland and The Netherlands says Bloomberg.

To us these suggestions make some sense, but not too much – Austria is neighboring, and it could feasibly buy Austria Telecom, which anyway has done a pretty poor job of maximizing its pay TV operation using IPTV, but both Telecom Italia and Orascom have tried before to buy into Austria Telekom and the government holding has always deterred them and of course we have to look just as much at mobile holdings, and T-Mobile and A1 would create a 73% plus cellular monopoly. Other Austrian pay TV operations are all cable, and unlikely to attract DT, which now has no cable holdings.

Poland for us is also a booming market, but as we point out, owning fixed lines is all very well, but it has to be possible to monetize them – you don’t buy into businesses which are slowing or losing revenue – unless you can turn them around – so DT needs to target IPTV and triple play as a critical area. And it would make sense that Deutsche Telekom could target operators where there is less pay TV penetration than its own country, 60% or under, unless it can buy a company that has a big share already. Poland has a penetration of 78% and Cyfrowy Polsat is the out and out leader, but is a satellite TV operation, with 3.3 million customers.

Deutsche Telekom is a fresh convert to satellite and is launching DTH operations in Germany, and already owns them in Romania, Hungary and Slovakia. It’s suddenly at home with this technology and a more creative play could be to buy a telco that has a poor or non-existent IPTV operation and purchase a major DTH business. In every case where DT has a satellite operation, it also have IPTV so it can offer a triple play.

So Cyfrowy Polsat could be a target, but since France Telecom owns Telekomunikacja Polska, and since Cyfrowy Polsat already has a market capitalization of €6 billion, it would mean that DT pays through the nose and still doesn’t achieve any fixed line dominance. Perhaps if it also bought Netia, which owns the second-largest fixed-line network in Poland, it might achieve enough momentum to dislodge France Telecom. Another company mentioned by Bloomberg is Telefonia Dialog, a subsidiary of Polska Miedz a big mining conglomerate, but it has only 466,000 physical lines and some wholesale lines on the incumbent’s network, which might be big enough for DT to get a start in Poland. Exatel was also mentioned, by so far, like Telefonia Dialog, has no triple play opportunity and would be a start up in TV.

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