Exclusive: Deutsche Telekom seeks investors to bankroll German internet overhaul - sources

By Arno Schuetze, Nadine Schimroszik and Pamela Barbaglia

FRANKFURT (Reuters) - Deutsche Telekom is offering investors stakes in a company it is creating to overhaul Germany's internet cables to help foot the bill for much-needed network modernisation, three people familiar with the matter said.

The deal is part of a German bid to catch up with other European countries such as Spain, which has outpaced Europe's industrial powerhouse by laying high-tech glass fibre cables while Germany is mainly stuck with old-fashioned copper lines.

Deutsche Telekom, Germany's main telecoms company, has come under increasing pressure to act quickly as the coronavirus pandemic has forced more people to work from home and rely on fast, stable internet connections.

The sources told Reuters that Deutsche Telecom and its adviser Deutsche Bank are targeting investors such as Dutch funds APG and PGGM and Canada's Brookfield and CDPQ, as well as sovereign wealth funds.

Deutsche Telekom's initial plan is to roll out fibre cables to 4 million households and investors will be offered stakes equivalent to up to half of the project's equity, the sources said. Further extensions of the network are likely.

The German company is following the strategy adopted by rivals, such as Spain's Telefonica, which have struck similar deals with investors to help pay for network upgrades.

Deutsche Telekom, Deutsche Bank and the prospective bidders all declined to comment.

At the same time, the German telecoms giant is kicking off the sale of its T-Mobile Netherlands business to cut its debt and free up cash for investment in infrastructure.

FOREIGN INVESTORS

Deutsche Telekom is a laggard when it comes to fibre as it bet on improved copper cables to supply internet connections and only switched to focusing on faster fibre cables in 2019.

Its move is part of a trend among German companies of turning to foreign investors to fund parts of the infrastructure that keeps the wheels of industry whirring, such as energy.

Power network 50Hertz, for example, is now majority owned by Belgium's Elia while gas-power firm Open Grid Europe is part-owned by Australian investor Macquarie.

Investment by China, however, is viewed sceptically. When China's State Grid wanted to take a stake in 50Hertz in 2018, German state lender KfW prevented the move.

Fibre networks are typically financed with 30% equity and 70% debt and Deutsche Telekom is looking for investors to contribute half of the equity with it providing the rest.

Telefonica struck a deal in October 2020 with German insurer Allianz to develop a fibre optic network in Germany for 2.2 million households in a project valued at 5 billion euros ($6.1 billion).

Assuming a similar valuation, Deutsche Telekom's project to supply about 4 million households would be worth some 10 billion euros, meaning investors would need to contribute 1.5 billion euros, or half of the 30% equity.

At its capital markets day in May, Deutsche Telekom Chief Executive Tim Hoettges underlined the company's commitment to accelerating the rollout of fibre in Germany, taking it from 600,000 households last year to 2.5 million in 2024.

He said the company plans to invest 2.5 billion euros a year in fibre infrastructure.

DUTCH MOBILE SALE

Deutsche Telekom's plan would still leave it trailing countries such as Spain and Sweden, where more than 60% of homes already get their internet via fibre cables. In Germany, only 5% of homes have fibre, slightly lower than Italy.

Deutsche Telekom executive Dominique Leroy has said its goal is to reach 10 million households with fibre by the end of 2024 and that it would seek partnerships where it makes sense.

While Deutsche Telekom is preparing to invest billions, it is also faces a large bill to exercise options to raise its holding in T-Mobile U.S. to more than 50% from 43%.

However, it is already saddled with 130 billion euros of debt and is now selling businesses to reduce the pile.

First in line is its subsidiary T-Mobile Netherlands, which is estimated to be worth up to 5 billion euros. The Dutch mobile business has 6.8 million customers and its sales last year came to 1.9 billion euros.

Deutsche Telekom's adviser on the deal, Morgan Stanley, has sent out first information packs to prospective bidders asking for offers by the end of July, people familiar with the process said.

Suitors including buyout groups KKR, EQT and Warburg Pincus are expected to take part, as is French telecoms entrepreneur Xavier Niel, the people said.

Warburg Pincus, which employs former Deutsche Telekom CEO Rene Obermann, came close to buying the business in 2015.

Morgan Stanley and the potential bidders all declined to comment.

Once that sale is out of the way, Deutsche Telekom may look to sell its telecom towers division, the people said, adding that while conversations with banks are taking place no decision has been taken.

($1 = 0.8248 euros)

(Editing by John O'Donnell and David Clarke)