June 16, 2016 / 11:00 AM / 2 years ago

Deutsche Telekom eyes bid for webhosting group Host Europe: sources

FRANKFURT/LONDON (Reuters) - Deutsche Telekom (DTEGn.DE) is eyeing a bid for web hosting provider Host Europe Group (HEG) as it seeks to beef up its cloud operations, five sources close to the matter said.

People walk past the logo of German telecommunications giant Deutsche Telekom AG seen at the Telekom's headquarters in Bonn February 25, 2016. REUTERS/Wolfgang Rattay/File Photo

The German telecoms firm plans to use its own webhosting subsidiary Strato as a platform to buy private equity-backed HEG and is looking to partner with U.S. private equity firms to fund the transaction, the sources said.

Hellman&Friedman and Blackstone (BX.N) are among the investment firms which are studying a joint bid with Deutsche Telekom, three of the sources said.

Deutsche Telekom, Cinven, Blackstone and Hellman&Friedman declined to comment or were not immediately available for comment.

HEG owner Cinven wants to kick off a sales process before August and aims for a valuation of around 1.7 billion euros ($1.9 billion), the sources said.

Strato, which was acquired by Deutsche Telekom in 2009 for 275 million euros ($310 million), is a much smaller platform and Deutsche Telekom is seeking a partner to finance such a merger, the sources said.

Headquartered in Berlin, Strato has core earnings of about 30 million euros and its enterprise value is only about a quarter of that of Host Europe, one of the sources said.

If successful, Deutsche Telekom could structure the deal as a partnership with buyout funds while retaining control of the asset, the sources said.

Chief Executive Tim Hoettges has repeatedly said he likes cooperation with private equity funds. Blackstone is a former major shareholder of Deutsche Telekom.

Hellman&Friedman recently worked with Deutsche Telekom on the acquisition of a controlling stake in Scout24, leaving the German firm with 11 percent of the online classifieds group.

Earlier this year, Deutsche Telekom and investor Centerbridge jointly bid for sports betting group Tipico, but lost out to a higher offer from private equity group CVC.

CLOUD APPEAL

Offering services via the internet, also called cloud services, has rapidly grown over the last couple of years.

Helped by increasingly fast internet and mobile connections, people and businesses can store data on remote servers instead of on local computers and call up the data from anywhere when needed.

Such businesses offer long-term contracts and tend to be stickier than mobile phone plans, providing telecoms companies with predictable income streams.

HEG, which supplies web hosting services mainly to small and medium-sized businesses, was sold to Cinven in 2013 for 438 million pounds ($619 million).

Cinven has since strengthened the group with a slew of acquisitions, including those of peers Telefonica Germany Online Services, domain factory and intergenia.

Sources at potential bidders said an HEG deal involves putting a price on its two separate businesses: mass market hosting and managed hosting.

Peer Rackspace RAX.N has a multiple to EBITDA of around 3.9 times, Endurance (EIGI.O) runs 7 times and GoDaddy (GDDY.N) commands a 12.4 times multiple.

Additional reporting by Harro Ten Wolde; Editing by Jonathan Gould and Adrian Croft

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