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Deutsche Telekom looks to next deal as Sprint merger buoys results

BERLIN (Reuters) - Deutsche Telekom's DTEGn.DE reported forecast-beating second quarter results on Thursday, lifted by the $23 billion takeover of Sprint by its U.S. business T-Mobile TMUS.O, and said it was looking to do deals in Europe from a position of strength.

FILE PHOTO: Logo of German telecommunications giant Deutsche Telekom AG and GSM antennas are seen atop of the headquarters of Deutsche Telekom in Bonn, Germany, February 19, 2019. REUTERS/Wolfgang Rattay/File Photo

The Sprint transaction, which closed on April 1, has tilted Deutsche Telekom's centre of gravity towards the United States where T-Mobile now generates three fifths of group revenue and has challenged AT&T T.N as the No.2 carrier.

Chief Executive Tim Hoettges is now turning his attention to Europe, where he said Deutsche Telekom was well placed to drive consolidation after its market value grew to 72 billion euros ($85 billion), putting it ahead of competitors Vodafone VOD.L, Telefonica TEF.MC and Orange ORAN.PA.

“We have created a currency (in the form of our shares) that protects us against possible takeovers, and that we can also put to work,” he told reporters on a conference call.

The transatlantic telecoms group issued new guidance for core profits to hit 34 billion euros ($40 billion) this year, above consensus forecasts, but said the cost of integrating Sprint would initially dent group cash flow.

A 47% rally in the T-Mobile share price this year has, however, not been matched by Deutsche Telekom’s own shares, which even after trading 2% higher on Thursday are ahead by just 6%.

Deutsche Telekom’s 43% stake in its U.S. business is now worth $61 billion, putting a so-called “stub” equity value on the rest of the group of just $23 billion.

OPERATIONAL EXCELLENCE

Recognising that shift, management highlighted strength of Deutsche Telekom’s German home market - where fixed-line gains offset mobile service revenues hit by the coronavirus pandemic - and in its Europe division.

“The best way to improve the valuation of the non-U.S. business is operational performance - and that was very impressive in the second quarter,” said Chief Financial Officer Christian Illek.

As for potential restructuring measures that could realise value, Illek said no decision had been taken on the future of Deutsche Telekom’s towers unit, while it was considering options for its Dutch mobile operator.

Group revenue rose by 37.5% to 27 billion euros in the quarter, above expectations, although after stripping out the impact of the U.S. merger and exchange-rate effects there was a 0.6% decline.

Core profit, measured as earnings before interest, taxation, depreciation and amortization after leases (EBITDA AL), rose by a reported 56.4% - also beating expectations - while on an organic basis it rose 8.4%.

($1 = 0.8472 euros)

Reporting by Douglas Busvine; Editing by Maria Sheahan and Jane Merriman

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