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Telekom eyes U.S. lines
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September 9, 1999: 6:48 p.m. ET
German phone giant gears up U.S. push, courting investors, investments
By Staff Writer Jamey Keaten
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NEW YORK (CNNfn) - Nowadays, when Deutsche Telekom AG talks, people listen.
That's because Jeffrey A. Hedberg, Telekom's international chief, is sitting atop of a cash hoard earmarked to buy telecommunications properties in overseas markets, and he has nearly carte blanche from Chief Executive Officer Ron Sommer to stake a larger claim overseas by using debt or stock.
Talking was just what Telekom (FDTE) was doing Thursday at a investor conference at Manhattan's Millennium Broadway Hotel, as the former telephone monopoly kicks of a road show to try to shuck its image among U.S. investors it's too stodgy for the fast-moving global telecommunications market.
Telekom, from the top down, has made no bones about its desire to snatch international properties -- a tack that's sparked a guessing game in the press and among analysts about what's on its plate.
Hedberg and DT are widely expected to go on a buyout binge in the United States this year, after a blockbuster $13.6 billion purchase of Britain's No. 4 mobile phone operator One2One last month.
At home, Telekom is king. It's Europe's largest telecommunications company, its Internet service provider unit has 3.3 million subscribers -- putting it among the leaders after America Online (AOL) -- and its stock is the one most weighted in the Frankfurt Dax index.
But revenue in that market is dwindling, its home economy is sluggish, and liberalization by German regulators has led to a outcropping of several tough new competitors -- causing Telekom increasingly to look abroad for its future growth.
The next piece in its global strategy is a larger share of the booming U.S. market. Telekom owns 10 percent of the long-distance provider Sprint Corp. (FON), which has a potent cell phone subsidiary, Sprint PCS (PCS), and speculation has been widespread it's looking to raise its stake in that company.
But a potential thorn in its side is its alienated partner France Telecom (PFTE), which also owns a 10-percent stake of Sprint. The three are partners in the troubled GlobalOne alliance, now seen as a loss-maker well into 2001 -- and perhaps beyond.
The French company turned sour on its former German ally after Telekom sprang forward with a surprise, and ultimately failed, bid to buy Telecom Italia. France Telecom says DT was required under partnership rules to notify France Telecom first before making such an aggressive buyout move.
The matter is now in court.
Hedberg says the disagreement, which sparked what he calls an illogically "emotional" reaction by France Telecom, stemmed from the differing visions about the global market at the two companies. His firm wants to own or control overseas companies; France Telecom wants just to buy small pieces, Hedberg said in an interview with CNNfn.com.
"Loose alliances and small minority positions in strategic assets are something we want to move away from," Hedberg said.
GlobalOne, which Hedberg called a potent international brand, is a complex business but its major shortcoming is that it's run by three separate hands. "With one person in charge, its value chain could be more profitably managed."
Sprint CEO William Esrey and France Telecom CEO Michel Bon have said the structure of Global One needs to be fixed, and Hedberg agreed that the "status quo is unacceptable."
Speculation has been rife about what kind of play Telekom might make stateside. Press reports have variously said the company has eyed an investment in AOL or Microsoft (MSFT), while possibly trying an outright purchase of Sprint or Qwest Communications (QWST), which is buying U S West (USW).
Hedberg is more attracted to the data-Internet Protocol segment, focusing on business services and shying away from the long-distance businesses where profit margins are shrinking. And buying a regional Bell company -- also former monopolies -- doesn't fit Telekom's taste for new-age, nimble, cutting-edge telecommunications companies.
Among the leaders in data, IP services and systems integration are companies like PSINet (PSIX), Level 3 Communications (LVLT), Qwest, Williams Communications, a unit of publicly traded Williams Companies (WMB) and Sprint. Hedberg wouldn't say exactly which companies Telekom is negotiating with currently.
Telekom, which recently launched a massive $12 billion secondary offering only three years after its initial public offering, has many financial weapons in its arsenal to pay for acquisitions. It's auctioning off a stake in its regional cable properties in Germany, a move that is likely to raise more than 20 billion German marks -- or about $10.8 billion.
Those cable properties, seen as attractive to overseas bidders because of they are contiguous, reportedly have many bidders such as the financial titans Deutsche Bank and Dresdner Bank, media giants News Corp. (NWS) and Bertlesmann, and even Microsoft and a group led by cable investor Callahan Associates.
The continent's No. 2 cabler, United Pan-Europe Communications of the Netherlands, has bid for all nine cable properties. Sources close to the auction say details of the sale are expected next week.
Meanwhile, Telekom is actively considering a plan to spin off its Internet and cellular businesses, with proceeds to be used for international developments.
A buyout binge from Telekom in the United States would hardly be an oddity for a German company in the wake of Daimler-Benz's $38 billion buyout of the No. 3 U.S. auto maker Chrysler Corp. last year.
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