EUR 850.00 For Business Accounts Only

Morningstar | Updated Report Deutsche Telekom AG

We are pleased with the strategic changes Deutsche Telekom is making. In January 2016, the company sold its stake in EE for a 12% stake in the enlarged BT Group and slightly more than GBP 2 billion in cash. This removes DT from directly competing in one of the most difficult markets in Europe, but leaves it as the largest shareholder in the only telephone company in the United Kingdom that fully owns and controls its own fixed-line and wireless telecom networks, leaving it well positioned for the movement to convergence. In the United States, the merger with MetroPCS provided a listing for this business and reduced DT's stake to 74%. So far, we have been impressed by T-Mobile US. Its "uncarrier" strategy has performed better than we anticipated and allowed the firm to grow its postpaid customer base by about 75% over the past five years, while the rest of the industry has been basically flat. We anticipate continued revenue and subscriber growth in the U.S. but remain concerned regarding its scale disadvantage versus Verizon and AT&T. However, if its proposed merger with Sprint succeeds, that should negate the scale disadvantage. Over time, we anticipate that DT will sell down its stake in the business.DT has also been addressing its problems in its home market of Germany. The company completed its Save for Service program one year early and has reduced costs by EUR 4.5 billion. German adjusted EBITDA margins have consistently been about 41%. However, competition has increased, making growth difficult, and the firm still has too many employees in Germany, especially on the fixed-line side. We anticipate that natural attrition will aid in this over time, as a significant portion of its employees are over 50.We now also expect DT's other European revenue to grow. The firm also continues to generate strong free cash flow. The firm has used cash to expand its operations in other countries, and international sales now outpace those in Germany. The firm still has room to grow in several markets, and we expect it will continue to invest in these areas.