Oct. 9 (Bloomberg) -- Deutsche Telekom AG, Europe's largest phone company, offered to buy out investors in its T-Online International AG Internet division for about 3 billion euros ($3.7 billion) to revive growth at its fixed-line business.
T-Online investors, which include France's Lagardere SCA, can either swap shares for Deutsche Telekom stock or receive 8.99 euros in cash, the same price as Friday's close, Chief Executive Officer Kai-Uwe Ricke said at a press meeting in Bonn.
Deutsche Telekom follows France Telecom SA, Europe's No. 2 phone company, in buying back shares in its Web division after listing the company at the height of the Internet boom four years ago. Ricke, saying ``times have changed'' since, now plans to merge T-Online and the T-Com fixed-line unit, the only one of the four divisions to report falling sales in the first half.
``They had better come up with a convincing broadband Internet strategy now to make this step worthwhile,'' said Frank Rothauge, head of telecommunications and technology research at Frankfurt-based Sal. Oppenheim Jr. & Cie. Buying back T-Online ``wasn't strictly necessary.''
Deutsche Telekom, which already owns about 74 percent of Weiterstadt-based T-Online, expects to complete the merger of the business in the second half of 2005 after gaining approval from regulators and shareholders, it said in a statement.
Management Changes
The value of a stock transaction won't be decided until January. Based on analysis by KPMG International, Deutsche Telekom said the exchange ratio ``based on current expectations of future developments'' will be below the ratio implied by ``current market prices from the perspective of T-Online shareholders.''
Ricke, 42, signaled that T-Online might be reintegrated when he appointed Walter Raizner to lead the T-Com fixed-line unit on Sept. 3, sparking the resignation of T-Online CEO Thomas Holtrop. Raizner, formerly the head of International Business Machines Corp.'s German business, will oversee the enlarged division encompassing broadband and fixed-line services.
``The merger is the right move at the right time,'' Ricke said. ``It fits seamlessly into our strategy to focus on broadband, mobile phones and business customers.''
Deutsche Telekom will finance the purchase from its free cash flow, Chief Financial Officer Karl-Gerhard Eick said. Eick said the purchase won't ``cost much more than 3 billion euros.''
The T-Com fixed-line unit had a 3.6 percent drop in first- half net revenue. Deutsche Telekom also owns a wireless unit called T-Mobile International and services division, T-Systems. T- Online, with more than 13 million customers in Europe, accounts for less than 5 percent of total sales.
Telekom Buyback
Ricke, the youngest chief executive among companies listed on Germany's benchmark DAX 30 Index, in May said there were ``no plans'' to buy back T-Online shares. One month after taking over from Ron Sommer in November 2002, he sold 9 percent of T-Online to help reduce more than 64 billion euros of debt.
Deutsche Telekom today said it plans to buy back some of its own shares next year to ``to eliminate any increase in the total number of shares outstanding as a result of the merger.'' It didn't specify how much stock it plans to repurchase.
The planned purchase of T-Online shares ``will in no way affect our plans to pay out an attractive dividend for this year,'' Ricke said. The former German monopoly would have to set aside at least 2 billion euros this year to meet investors' expectations, a Bloomberg survey of a dozen investors showed.
Rating Upgrades
Ricke's debt-reduction efforts helped Deutsche Telekom regain higher credit ratings with Standard & Poor's and Moody's Investors Service. Moody's in July said it may raise its rating for a second time this year from Baa2, the second-lowest investment-grade ranking, as Deutsche Telekom improves cash flow and benefits from growth at its U.S. division, T-Mobile USA.
T-Online in August reported record quarterly profit as discounts helped it sign up more users for high-speed Internet access than competitors such as United Internet AG or Freenet.de AG. The company was also profitable in its international business for the first time. T-Online, which earlier this year shuttered operations in Austria, runs units in Spain and France.
T-Online forecast net income will rise to as much as 300 million euros this year, while sales will rise between 8 percent and 12 percent. The company expects to hold more than 50 percent of the German broadband market, which T-Online forecast will almost triple to 12.6 million users by 2008.
Broadband Internet connections are gaining in popularity as people increasingly download pictures, movies and music. High- speed Internet use in Germany, Europe's largest economy, is less than half of that in the U.S., according to figures by German industry group Bitkom.
`Totally Unacceptable'
Deutsche Telekom first sold shares in T-Online in April 2000 for 27 euros each. T-Online's stock has fallen 10 percent in the past 12 months, putting it among the 10 worst performers on Germany's TecDax Index. T-Online shares rose to a record of 48 euros in May 2000, valuing the company at 58.7 billion euros. The shares touched a low of 4.85 euros in Sept. 2001.
Ricke said Lagardere, which owns a 5.7 percent stake in T- Online, hasn't been contacted yet.
``The offer is totally unacceptable,'' Ulrich Hocker, head of the DSW small shareholders group, said in an e-mailed statement. ``Shareholders lived through the entire downturn and now they're requested to give up their stock just as business picks up again.''
Hocker advised T-Online shareholders to wait for Deutsche Telekom to detail its plan for swapping T-Online stock.
