BREAKINGVIEWS-Deutsche Telekom’s cash cow may outgrow its owner

By Jennifer Johnson

LONDON, Aug 7 (Reuters Breakingviews) - Other European telcos want what Deutsche Telekom DTEGn.DE has: a fast-growing business in a consolidated and competitive market. The former German state monopoly has a 52% stake in $269 billion U.S. wireless operator T-Mobile US TMUS.O, which brought in two-thirds of its parent’s sales and adjusted EBITDA after leases in the first half of the year. That dependency looks set to keep growing. While it’s a boon for Deutsche Telekom shareholders, the arrangement could eventually become a liability for its offspring.

T-Mobile US was created in 2001 when Deutsche Telekom bought VoiceStream Wireless. The German company has been the group’s largest shareholder ever since, though the size of its holding has fluctuated as the American mobile market consolidated. A 2020 merger with stateside rival Sprint diluted Deutsche Telekom’s 60% stake; it only reclaimed a controlling interest in 2023.

Keeping a grip on its subsidiary has been rewarding for the company run by CEO Tim Höttges. While revenue growth in Europe has been notoriously humdrum – Deutsche Telekom’s sales in Germany shrank by more than 1% in the first half – the top line at T-Mobile US swelled by around 6% to 38 billion euros.

The growth is reflected in valuations. The U.S. unit’s shares trade on almost 20 times expected earnings for the next 12 months, according to LSEG, in turn boosting its parent’s worth. Over the last decade, Deutsche Telekom stock has traded at an average multiple of 14 times 12-month forward earnings, according to Breakingviews calculations. European rivals Orange ORAN.PA and Telefónica TEF.MC were both valued at around 11 times over the same period. The German company’s market value of 151 billion euros is larger than Orange, BT BT.L, Telefónica and Vodafone VOD.L combined.

This structure is only set to become more lopsided. By the end of the decade, analysts polled by Visible Alpha reckon T-Mobile US will account for 70% of its parent company’s adjusted EBITDA after leases. Deutsche Telekom shareholders – including the German state and government-controlled bank KfW, which both own 14% – seem happy with this arrangement.

However, it’s possible to imagine a scenario in which the U.S. offshoot wants greater freedom from its European parent. Controlling shareholders have the heft to block potentially transformative M&A deals and capital raises which could dilute their control. Any transactions could also face scrutiny from U.S. regulators uneasy about an overseas government’s indirect interest in a critical domestic industry.

For now, Deutsche Telekom’s relationship with its U.S. subsidiary looks symbiotic. The European company’s shareholders reap the benefits of growth in the American telecom market, and T-Mobile enjoys the stability of a supportive backer. Sooner or later, though, the cash cow may outgrow its owner.

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CONTEXT NEWS

Deutsche Telekom on August 7 reported that its preferred profit measure, adjusted EBITDA after leases, rose 5% year-on-year to 22.3 billion euros in the first half of the year. The German company also slightly raised its core profit guidance for the full year from “around” 45 billion euros to more than 45 billion euros.

Deutsche Telekom shares were down more than 3% at 0930 GMT due to weakness in the group’s home market, where revenues declined more than 1% on last year.