Dec 07 - Thursday's announcement by Deutsche Telekom (DT) of a planned dividend cut in 2013 and 2014 - combined with an increase in next-generation-network investment in Germany - is a pragmatic step to counter domestic competitive threats and to position the German business for future challenges, Fitch Ratings says.
The substantial planned increase in capex to EUR9.8bn in 2013 from an estimated EUR8.3bn this year will push the roll-out of high-speed fixed broadband in Germany, as well as a ramp-up in DT's mobile Long Term Evolution (4G) deployment. These investments should help DT combat the growing fixed-line threat of cable television networks, while the LTE investment in particular should differentiate DT and Vodafone as the two leading mobile networks in Germany. Higher investment in the US will also work towards improving DT's fortunes in that market.
A positive factor for bondholders is that these investments will be funded largely by cuts to the dividend in 2013 and 2014 - which we estimate will save the group approximately EUR850m in each year.
Less clear is the trajectory for a return to EBITDA growth, which these investments are expected to underpin. Our rating case assumptions already take in a conservative estimate of around a 1% fall in 2013 and flat performance in 2014. The reallocation of dividend cash towards more progressive network investment increases the likelihood that DT will outperform against these assumptions.