EUR 850.00 For Business Accounts Only

Morningstar | Deutsche Telekom Receives Unconditional Regulatory Approval to Buy Tele2’s Dutch Operations

On Nov. 27, Deutsche Telekom announced the European Commission unconditionally approved its acquisition of Tele2’s operations in the Netherlands. We were sceptical of the deal being approved after the commission had previously rejected other four-to-three wireless telecom mergers. While we had not expected the deal to be approved, it doesn’t change our EUR 17 Deutsche Telekom or SEK 91 Tele2 fair value estimates, or our no-moat ratings for both companies.

We now model the companies as if the transaction takes place on Dec. 31, 2018. Thus, Tele2 will lose about SEK 6.5 billion in revenue, which will be made up by its recently completed acquisition of Com Hem. However, its EBITDA margin will immediately jump significantly as the Dutch business had low margins. That said, we had modeled significant margin expansion over the next four years as the Dutch business gained scale. Thus, our 2022 EBITDA margin remains unchanged. For Deutsche Telekom, the deal is much less significant due to its much larger size. However, it should boost its revenue growth in 2019 by almost two percentage points.

We believe the deal was approved due to concerns Tele2’s operation might not survive on its own. Thus, we don’t think it means the commission is now open to other four-to-three wireless mergers. We also believe it shows the difficulty of a late fourth entrant in a small country. Thus, we think Belgium’s attempt to attract a fourth entrant will fail, which is a positive for Proximus, whose stock was hammered earlier this year when the government stated it would provide low cost spectrum in the next wireless auction for a new entrant.

However, we think the approval of this deal increases the likelihood of the commission approving Vodafone’s proposed acquisition of Liberty Global’s assets in Germany, Hungary, Romania and the Czech Republic. We have also been sceptical of that deal being approved, but again we don’t see approval changing our fair value estimates for either firm.