Will the share soon break through the 20 euro mark?

Hamburg Telekom CFO Christian Illek was able to go to bed on July 13th. After the supervisory board had also approved in the early evening, one of the biggest deals in the history of the group was a done deal: the financial investors Brookfield and Digital Bridge, the group announced on the following day, would buy a majority stake (51 percent) in the radio tower business of Deutsche Telekom.

The portfolio of more than 40,000 masts, on which Telekom itself and other mobile phone providers rent space for their antennas, was valued at 17.5 billion euros as part of the deal. That was a little less than investors had expected in the meantime. But Illek can still look forward to 10.7 billion euros in cash, which should flow into his accounts at the end of the year – unless the antitrust authorities still express concerns.

The Telekom shareholders can also be satisfied. Because the group gains room for maneuver with the sale of the tower. Thanks to a back door, he still has the opportunity to regain control of this not inconsiderable part of his infrastructure in the future. The stock could soon cross a psychologically important threshold.

In the days of the deal, the paper fluctuated relatively unimpressed around the already high price of EUR 19.20, taking into account the price development in the recent past. Market experts showed the sale, however, what potential could still be in the T-Share – provided that the dividend finally increases.

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Telekom is currently worth almost 90 billion euros on the stock exchange. Only Linde and SAP achieve a higher value in the leading German index Dax.

The T-Share had developed well above average in the past twelve months and beat the Dax and European telecom competitors. The paper has gained about twelve percent since the beginning of the year, while the leading index has lost about 16 percent. The European industry index is almost two percent higher.

Big bets, big hopes

A team led by US board member Thorsten Langheim, who does the big business for the group, haggled over the towers for months and ultimately preferred an offer with a relatively high degree of flexibility and a high cash component.

Telekom is dependent on fresh money. The board of directors around its chairman Timotheus Höttges has made several expensive bets in recent years, the implementation of which continues to consume liquidity.

Another consequence: Under Höttges, the group’s indebtedness skyrocketed to unprecedented heights. In the first quarter of 2022, net debt rose again by five percent to over 135 billion euros compared to the same period last year.

Telekom spent a lot of money, especially in the USA. And Höttges has not yet reached its goal there. Along with Dealmaker Langheim, he wants to increase Telekom’s share in the successful subsidiary T-Mobile-US from the current 48.4 percent to 50.1 percent. Analysts at Deutsche Bank currently estimate the costs for this step at around seven billion euros.

Telekom benefits from a deal with the Japanese Softbank from 2021, which gives Bonn access to 44.9 million T-Mobile shares at a fixed price of a good 101 US dollars as part of a capital increase. Today, the paper of the US subsidiary is traded on Wall Street for more than 140 US dollars.

In addition, there are billions more that the Telekom boss has to invest in fiber optic expansion and mobile radio frequencies. Höttges needs the additional capacity to continue growing in the future. Another auction for valuable radio spectrum started in the USA on Friday. At an auction in January, T-Mobile acquired frequencies for around three billion US dollars.

>> Read also: Deutsche Telekom is preparing to say goodbye to boss Höttges – and apparently has a successor solution

The hope is that the US bet in particular will more than pay off in the long run. The cash flow should continue to increase and enable higher transfers to Bonn. From there, some analysts hope, part of the money could then flow to the shareholders in the medium term. In the short term, Telekom will benefit from a share buyback program at T-Mobile that is scheduled to start later this year.

So far, things are largely going according to plan in Bellevue near Seattle, the headquarters of the T-Mobile Group. The former low-cost attacker can still announce record numbers. While the competitors AT&T and Verizon recently had to correct their forecasts downwards, T-Mobile boss Mike Sievert announced further sales successes when presenting the quarterly figures last week. He is now assuming customer growth of over six million in the current year.

The downside of the aggressive strategy: Various IT security scandals and union lawsuits. T-Mobile has yet to prove that it can also handle the more serious business with business customers.

Sprint’s damp basement

One risk remains a recession, which is already looming in the US and Europe. Telecommunications groups have traditionally been less affected by similar setbacks than other sectors.

In view of Telekom’s tight financial situation, it is now easier to understand why they would rather swap their radio towers for cash in the end. A few months ago, a sale to the European mast market leader Cellnex, which wanted to pay in Bonn with its own shares instead of cash, seemed likely.

Because Höttges’ ventures are driving the liabilities, which had skyrocketed, especially in the course of the merger of T-Mobile US and its former competitor Sprint. The number four in the US mobile communications market was considered over-indebted and not competitive in the long term.

Sprint’s damp basement could also cause surprises in the future. For example, since the temporary integration costs were higher than expected, T-Mobile had to post a net loss in the most recent quarter. On the other hand, Sievert is now anticipating more synergies.

Telekom CFO Illek had promised to reduce the group’s record debt by the end of 2024 at the latest. They are currently well above the target corridor they have set themselves, which would allow a maximum of 2.75 times the adjusted annual profit. A part of the tower proceeds should also flow into the reduction of liabilities. In corporate circles there is talk of around five billion euros.

Telekom shares convince investors

Investment banks are still bullish: 26 of the 28 analysts who monitor the paper according to the financial service Bloomberg recommend buying the share. Deutsche Bank analyst Robert Grindle even credits her with 26.50 euros.

In Tokyo, too, people believe in the Telekom team. Softbank boss Masayoshi Son paid 20 euros for his new T-Shares as part of the capital increase eleven months ago. That was a premium of a good twelve percent compared to the level at the time.

In Bonn, 20 is considered the magic sound barrier. It has been over 20 years since the paper traded at this price. If the 20 billion euro share buyback program in the USA succeeds and the continuous increase in dividends, the breakthrough could happen soon.

The Funkturm deal gave the optimists additional hope as it revealed the deep discount at which Telekom shares are trading. The US and the mast business are currently, added up separately, worth more than the entire group – despite the comparatively high price of the T-Share. Höttges and his team now have to prove to the market that the whole is at least as valuable as its parts.

More: Telekom sells radio towers – That’s how the 17.5 billion deal went

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