Reportedly Flirting With AOL, Deutsche Telekom Still Needs a Telco Partner

But a cash deal with AOL or not, it's almost certain that DT's war chest will be a lot lighter before year's end.
Author:
Publish date:

When

Deutsche Telekom

(DT) - Get Report

raised around $12 billion for acquisitions in a June capital increase, many investors were asking themselves what the former German telephone monopolist was going to buy with all that cash.

After reports this week that Telekom was hoping to take a minority stake in Internet giant

America Online

(AOL)

, those very same investors may well be asking the simpler question: "What are they doing?"

Earlier in the week, Germany's leading business daily

Handelsblatt

reported that DT Chairman Ron Sommer has for weeks been holding advanced talks with AOL CEO

Steve Case

over a possible deal. While the reports were subsequently denied and investors likely wouldn't have anything against the strengthening of Telekom's Internet business, shareholders might be forgiven for thinking the chairman should perhaps have other priorities.

The denials didn't ruffle investors, who were perhaps preoccupied with

Federal Reserve

Chairman

Alan Greenspan's

congressional testimony. In early afternoon trading Thursday, Deutsche Telekom ADRs were down 3/16, or .5%, to 41 5/16 in New York, while AOL shares were off 4 9/16, or 4%, to 110 1/2.

Sommer has gone silent on his strategic plans since his failed merger bid with

Telecom Italia

(TI)

went horribly awry two months ago. That debacle left DT lacking a global partner for its telephony business and that's where, according to some, Sommer should be concentrating his efforts. Courting Case, they argue, should be lower on his to-do list.

Besides the fact that a piece of AOL wouldn't come cheap -- a 10% stake alone would cost Telekom around $13 billion at current stock prices -- any possible deal would be a regulatory nightmare. Deutsche Telekom's Internet unit,

T-Online

, is Germany's market leader with 3.3 million customers, while AOL Deutschland is number two with 900,000.

It would also quickly drain Telekom's $19 billion war chest. That cash is needed to give DT a shot at becoming a global player -- such as gaining a foothold in the lucrative U.S. market by buying long-distance carrier

Sprint

(FON)

. Barring hooking up with a U.S. company, Telekom will at the very least need the money that would be spent on AOL for a partnership with another European telecom.

Last week the rumors were that Sommer could be traveling to Madrid soon to sign off on a deal with Spain's

Telefonica

. Even though the Spaniards need a partner as much as DT does to keep up with the rest of the telecommunication Joneses, neither company seems particularly smitten with the other.

Putting aside any such competition questions from either Berlin or Brussels, one possible option could be an alliance between AOL and T-Online, which could be financed by a floatation of DT's Internet operations. Another might be some sort of bartering involving Telekom's cable TV network.

Loath to upgrade its cable for multimedia and telecommunications competitors, DT has already had

discussions about a cable deal with publishing and media giant

Bertelsmann

, which coincidentally is the joint venture partner in AOL Europe.

Cash deal with AOL or not, it's almost certain that Deutsche Telekom's war chest will probably be a lot lighter before year's end.