IHS Global Insight Perspective | |
Significance | Deutsche Telekom announced in its annual general meeting that it will begin to merge its fixed and mobile units in Germany. In other news, Financial Times writes that the company's major shareholders are pressing the management to consider divestment of T-Mobile UK, its U.K. subsidiary. |
Implications | The fixed-mobile integration will be formally proposed in an extraordinary meeting later in 2009. As for T-Mobile UK, an M&A move involving a competitor, most possibly 3, would be an alternative. |
Outlook | The new domestic business unit is aimed at adding to the operator's appeal among business customers smaller than the corporate-sized ones served by T-Systems, a response to the similar strategies being implemented by Vodafone and Telefónica. |
Following its annual general meeting, German telecoms group Deutsche Telekom has announced that it will start the process of integrating its domestic fixed-line and mobile arms—T-Home and T-Mobile, respectively—into a single business unit. Explaining the restructuring to the shareholders, the company's chief executive, Rene Obermann, said that in Germany "mobile and fixed-network services will in the future be planned, built, managed, and marketed from a single mould". The plan will be formally proposed in an extraordinary shareholders' meeting later in 2009.
In separate news, the Financial Times reports that Deutsche Telekom's two main shareholders, the German government and private equity firm Blackstone, which control 32.0% and 4.5% of the stock respectively, are putting pressure on the company's management over the future of T-Mobile UK, the operator's U.K. mobile unit. Citing people familiar with the supervisory board, the newspaper writes that the issue of exiting the U.K. market was first aired about six months ago, but falling asset valuations soon made the two owners more cautious about pursuing a sale option alone. One source told the newspaper that, as an alternative to a divestment, the government and Blackstone could consider a merger or acquisition deal with a U.K. competitor to gain market share.
Outlook and Implications
Following Vodafone in Fixed-Mobile Convergence: Deutsche Telekom gave the first indication of its restructuring plan when releasing its 2008 results in February (see World – Germany: 27 February 2009: Deutsche Telekom Beats Expectations in Q4, Adjusted EBITDA Up 1.3% Y/Y). The strategy is in line with the overall fixed-mobile convergence (FMC) trend, which is pushing telcos everywhere to integrate the two increasingly overlapping business segments and which in Germany has been pioneered by Vodafone. Vodafone, Deutsche Telekom's leading rival in both mobile and broadband markets, acquired the 26.4% of the shares it did not own in Arcor, its local fixed-line subsidiary, in May 2008 and announced subsequently that it would in the future manage both operations under one integrated unit—targeting mid-term synergy benefits worth 100 million euro (US$126 million; see Germany: 19 February 2009: Vodafone-Arcor Merger to Bring Mid-Term Synergies of 100 mil. Euro—CEO). Of Deutsche Telekom's other major rivals, Telefónica is also moving in the same direction, having said that it would arrange its business-to-business and the operation of the mobile and fixed-line infrastructures into a single unit (see Germany: 17 April 2009: Telefónica Merges Business Units in Germany).
Restructuring Aimed at Business Customers: The merger is mostly aimed at strengthening the group's clout among business clients, namely the ones currently served by T-Home. As such, it is continuation of the reorganisation that started when Deutsche Telekom decided to use T-Systems—its business client unit—for providing services only to its 400 largest corporate-sized customers, transferring the smaller ones to T-Home (see Germany – World: 5 March 2009: T-Systems to Improve Profit Margins, Seeks Growth at Home and Abroad and Germany: 10 November 2008: SME Clients Critical of Deutsche Telekom's Restructuring; CEO Plays Down Acquisition Rumours—Reports). Although the trend is spreading to the residential sphere as well, for the time being the FMC offerings have their biggest appeal in the business sector, and through the new integrated unit Deutsche Telekom intends to tap into this potential. The firm has said that the move is not meant to result in significant job cuts, although some managerial positions will probably be affected.
T-Mobile U.K. Increasingly Regarded as Liability: The U.K. operations—partly because of currency fluctuations—took most of the blame when Deutsche Telekom last week gave a profit warning, adding that it is responding to this by implementing further cost reductions as well as by revamping the unit's management (see Germany: 22 April 2009: Deutsche Telekom Cuts EBITDA Forecast for 2009 as Slowdown Finally Bites and United Kingdom: 8 April 2009: T-Mobile Reported to Be Cutting a Further 300 Call Centre Jobs in Scotland). Although the disappointments in the United Kingdom may to a certain extent be down to underperformance, IHS Global Insight's view is that the core problem is nonetheless the market itself, with five operators and fierce competition. Future regulatory interventions, in the form of lower mobile termination rates, will add more pressure on the carriers' revenue over the medium term—by cutting the price of interconnection by up to 21% by 2011 (see United Kingdom: 3 April 2009: Competition Tribunal Confirms Mobile Termination Rate Cuts). At the same time, Deutsche Telekom seems to be willing to improve performance at T-Mobile USA, its largest foreign subsidiary, through further investments—rather than streamlining—which as such is increasing the likelihood that it may well consider freeing up resources either by divesting the U.K. business or by seeking synergies from a merger with 3, the smallest of its competitors.