Why does Germany still own a third of Deutsche Telekom?

Friday 5 January 2018 | 11:33 CET | Background

In the early 1980s, the German government had a plan to replace every phone line in the country with fibre optics. If it had gone ahead with the plan, all of (west) Germany would have been covered with fibre by 2015. Instead, Europe’s largest economy languishes at the bottom of the fibre rankings, with barely 3 million homes able to receive FTTH. With Deutsche Telekom showing little appetite for investing in fibre, it's time for the German government to take action. Selling its remaining shares in DT offers a way to accelerate the country's investment in broadband.

Full fibre by 2015

According to cabinet meeting documents obtained by the German newspaper WirtschaftsWoche, the liberal-socialist government led by chancellor Helmut Schmidt in 1981 considered a plan to bring fibre to all of Germany. The Deutsche Bundespost (Deutsche Telekom’s predecessor) would invest 3 billion marks a year over 30 years to complete the coverage of West Germany. After the CDU’s Helmut Kohl took over as chancellor in 1983, the plan was shelved and the country decided instead to invest in cable networks.

While rolling out fibre has become much cheaper in the intervening years, the cost of upgrading Germany’s broadband network is still estimated at over EUR 20 billion. Coincidentally or not, this amount could be covered fully by the German government selling off its remaining 32 percent stake in Deutsche Telekom, which is worth around EUR 22.5 billion at the current share price. That even leaves a couple billion left over for investments in 5G.

Conflict of interest

Why does the German government still have such a large stake in DT? With one of the few balanced budgets in Europe, Germany doesn’t need the dividends. Some point to security concerns about protecting critical infrastructure, but Germany also has some of the best data protection and security legislation in Europe. Furthermore, no infrastructure can be completely protected these days from cyber threats, whether it’s directly owned or not.  

Deutsche Telekom has warned the state against selling the shares, pointing both to the security issues and uncertainty about who would acquire the stock. However, it is unlikely the government’s stake would be sold in a single block – more likely it would go for a series of book-building sales on the open stock market. DT would end up with more institutional shareholders, the same as already make up the majority of its shares. 

The proposal to sell off the DT shares in order to invest in broadband has the backing of both the FDP and Greens, but these two political parties are no longer in the running to form a government in Germany. It will be up to the two biggest parties, the SPD and CDU, to decide what to do with the DT shares - assuming they can form a government. The state’s own Monopoly Commission has already recommended the government dispose of the shares, noting this would bring an end to the state’s conflict of interest as both shareholder and regulator of DT.

DT’s investment record

According to the German broadband association VATM, Germany had around 3.1 million households able to receive FTTH/B at the end of 2017. The majority of these connections were built by alternative, regional operators, while Deutsche Telekom was estimated to account for just 747,000 homes passed and less than 100,000 homes connected.  

This feeble performance by DT is difficult to defend when compared to other EU markets like France, Sweden or Spain, where already millions are subscribing to FTTH. In recent months Deutsche Telekom has stepped up its efforts, launching its first gigabit broadband subscription and agreeing new partnerships with regional operators to roll out more FTTH connections. However, DT still appears reluctant to put much money into FTTH, focusing its efforts instead on the ongoing VDSL upgrades

Deutsche Telekom appears more interested in investing abroad, in its profitable US operations and the recent takeovers to expand in Austria and the Netherlands. If the German government values its dividends, it may support DT’s strategy and remain a shareholder. As DT is publicly listed, it would be difficult for the German government to force a major change in DT's strategy, even as the largest shareholder. So if the government does want to prepare German homes and businesses for the digital future, it could do better to sell its DT shares and develop its own strategy to invest in fibre, with the many other operators active in Germany.

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