Deutsche Telekom has unfinished business with BT

The boss of Deutsche Telekom AG says his biggest mistake was a 2015 deal to take a stake in BT Group Plc. Many fund managers with shares in the UK telecoms firm probably feel the same way. But Tim Hoettges, in his 10th year running the German company, wasn’t just giving the Financial Times a confession. His stated ambition to recoup losses on the holding looks like a strategic shift.

Rewind to the original deal. BT was looking to get back into mobile telephony, regretting the 2001 spinoff of its mmO2 network. It bought EE from joint owners Deutsche Telekom and France’s Orange SA at a valuation of £12.5 billion ($14.9 billion).

Orange received mainly cash, plus a 4 percent stake in BT. By contrast, Deutsche Telekom took mostly BT shares, representing a 12 percent stake. BT has since lost roughly two-thirds of its value. Chief among the raft of reasons are doubts over whether the heavy cost of upgrading its broadband network will ever deliver returns.

It’s a worse look for Hoettges. Sterling weakness exacerbates Deutsche Telekom’s hit in euro terms. There’s also the unflattering comparison with Orange’s decision to grab the cash and then sell all its BT holding.

For Deutsche Telekom, taking a stake was a strategic and financial decision. It was a believer in BT’s convergence strategy combining fixed-line telephony, mobile, internet and pay television. The holding could make any future takeover of BT easier, or at least obstruct another bidder getting its hands on the company. Hoettges was also acting like a fund manager in betting the shares would rise. That’s not his job.

Deutsche Telekom later transferred the BT holding to its pension fund, as if it had become a non-core holding. But Hoettges’ preoccupation with it suggests it’s more than a passive financial investment. Referring to the losses, he told the FT he “will get that money back” (an apparent allusion to comments once made by former UK premier Margaret Thatcher to the European Council).

BT’s share price was 423 pence just before the EE deal was inked. The stock ended Thursday at 141.50 pence. The average analyst target is 188 pence. For Deutsche Telekom to get close to being made whole, the shares would have to surpass that level and a bidder would have to pay a premium on top. This looks far-fetched. Billionaire entrepreneur Patrick Drahi has an 18 percent stake and is seen as a possible buyer. But it would be brave to bet on him assembling a consortium to make a generous offer, and the UK would be wary of letting the asset fall to a foreign private equity bid.

The alternative for Hoettges is to double down and buy more shares, or even make a full takeover offer, potentially with Drahi as a junior partner. BT’s cash burn on its fiber network will end in a few years. If the UK firm’s expanded broadband customer base then started throwing off cash, that could support a strong dividend stream and rapid returns. Small wonder that Hoettges told the FT his options include increasing the BT holding or partnering with another big shareholder.

Of course, a full-blown Deutsche Telekom-BT tie-up would also face a UK national security review. Any deal would effectively be a political partnership, given the German state is Deutsche Telekom’s lead shareholder. As a cross-border transaction, it’s far from clear what the synergies would be.

Even if taking BT shares remains a regret, Hoettges can afford to be frank about it. The pain of calling the UK wrong is outweighed by the gain of getting the US right. T-Mobile US Inc, of which the German company owns almost half, has been a stellar performer. Deutsche Telekom is one of the world’s top telecom investments during Hoettges’s tenure — especially impressive given it was a big company to start with.

But if Hoettges wants to do a full combination with BT, it will have to be predicated on more than his hunch that it’s cheap. He’ll need to articulate some clear industrial logic. Otherwise he’ll be acting like a fund manager all over again. Bloomberg