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When Tim Höttges got the top job at Deutsche Telekom in 2014, he was given a clear mandate from the board and investors: exit the US. But once in post he had a different idea.
“I looked into it and came to the conclusion that the US is the best telecoms market in the world, so why should we,” Höttges told the Financial Times.
His decision to stay put and double down on the lucrative US market — investing considerably in its T-Mobile division which bought troubled carrier Sprint from SoftBank in a $59bn deal in 2020 — was the most fortuitous decision the company ever made. It has transformed Deutsche Telekom from a €30bn company, the fourth-largest telecoms player in Europe, to a €112bn giant, worth more than Vodafone, Orange, Telefónica, and BT combined.
Where other incumbent telecoms groups across the continent have suffered stagnating sales and profits as they struggle to monetise the billions invested in the rollout of full fibre and 5G, Deutsche Telekom’s profits have risen by nearly 70 per cent over the past five years.
“I’m not more clever than all of the other guys in this industry,” said Höttges. “The only problem is they’re sitting in a market which is killed by political leadership . . . and billionaires taking advantage of the situation,” he added, referring to regulators’ hesitation in allowing some of the biggest groups to consolidate, and recent instances of private equity groups and telecoms tycoons taking stakes in distressed UK telecoms groups.
As Robert Grindle, an analyst at Deutsche Bank, put it: “US investors love the telco, European investors are much harsher.”
But Grindle and other analysts, investors and insiders say that Deutsche Telekom has benefited from some astute decisions as well as luck, offering a potential playbook that their rivals could look at.
These include reinvesting profits made in the US into the American business rather than funnelling them back to the group as a whole, divesting from poorly performing markets and making investments when and where they matter at home on things such as network upgrades, building brand recognition and customer service.
The US telecoms market is valuable because it has some of the highest customer prices in the world, in large part because there are only three main operators, compared with four in most European countries. The position of T-Mobile US, the second-largest mobile carrier in America which offers mobile data and wireless internet to more than 114mn customers, means attractive rewards for those who own it.
Höttges earlier this month made good on his ambition to raise his stake in the company to more than 50 per cent. But he said he had no immediate plans to build the stake significantly beyond this.
His priority now is to reduce debt at the group level, from three times earnings before interest, tax, depreciation and amortisation to between 2.25 and 2.75 times.
Deutsche Telekom has also proved it is one of the groups willing to cut its losses and call time on the empire building that in previous years characterised the sector, dialling back on expansion when necessary. Where other groups have over the past decade largely held on to their sprawling international assets, Deutsche Telekom sold T-Mobile Netherlands in 2021, as well as its businesses in Bulgaria and Albania.
By contrast, Vodafone has largely held on to many of its businesses across Europe and Africa, although it has started reversing course more recently, selling its Hungarian business and looking at potential deals in Italy and Spain.
“It doesn’t make sense to ride a dead horse,” Höttges said of staying in markets so competitive it was difficult for telcos to survive profitably. “We are either able to consolidate in the market or we exited it.”
But in the markets Deutsche Telekom is still present in — the US, Germany and several eastern European countries including Romania and Hungary — local leadership is given significant decision-making power. “There is a principle of empowerment of the locals,” Höttges said.
It has not, however, been entirely smooth sailing for Deutsche Telekom. Höttges conceded that he made his “biggest mistake” in accepting BT shares as payment for selling Deutsche Telekom’s stake in EE in 2015, which has cost the group £4bn in paper losses.
There are also potential clouds on the horizon.
As the cheapest of the major American operators, T-Mobile US is less sensitive to an economic slowdown than AT&T and Verizon, but it could still suffer from a tightening of consumer purse strings. There is also a possibility that customers could begin to favour companies that offer both mobile and broadband services — also known as “converged players” — and it is not yet clear whether the US business has a strategy for that eventuality.
Close to home in Germany, now its second-largest market, the group has benefited from both fortune and sound judgment, according to analysts and investors.
“It’s not just in the US market they’re outperforming, it’s the European one too, which testifies to good management, and having some sort of secret sauce in managing these businesses in a sustainable way,” said Grindle.
They point to the group’s emphasis on brand approval and customer experience and the fact that it started adding some fibre to its network very early when it upgraded its legacy copper lines in the early 2010s — making it less of an urgent and costly priority to move to full fibre over the past decade.
But one investor noted that they were also “lucky”, in that their key competitors were Vodafone and Telefónica — “some of the most leveraged players in the industry” — which were equally reticent about making colossal and rapid investments in fibre upgrades. “There was no one challenging Deutsche on the network, even on their weakest days,” they said.
But that could change. Rival Vodafone is investing heavily to turn round its floundering performance and could present a more robust threat to the incumbent in the next few years.
Deutsche Telekom’s copper network upgrades bought it extra time and the company is making swift progress on its transition to full fibre, with coverage expected to increase from 13 per cent of all German homes to 60 per cent of all German homes by the end of the decade. But this will still require about €30bn of investment.
The group does have an extra €10.7bn in cash from the sale of a majority stake in its towers assets last year, boosting its free cash flow which now sits at €11.5bn. But Höttges said he would not rest on his laurels.
“Nothing changes as rapidly as success,” he said. “It makes me nervous . . . because in success sits complacency. In success sits failure.”
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