Telecompetitor Arches

Deutsche Telekom Faces a Choice

One potential impact of the failure of the AT&T bid to buy T-Mobile USA is investor concern about whether Deutsche Telekom’s dividend could be cut. The company says the current payout will be maintained through 2012. But that only makes investors wonder what will happen afterwards.

The problem is that DT had expected to be able to use the $39 billion in proceeds from the sale of T-Mobile USA to pay down debt and increase investment in Germany. The $3 billion break-up fee Deutsche Telekom will receive from AT&T is, of course, an order of magnitude smaller than what DT had hoped to receive.

Spending to improve T- Mobile USA’s network, which means acquiring spectrum to build a fourth-generation Long Term Evolution network, then building the network, might cost as much as $9 billion, said RBC Capital Markets analyst Jonathan Atkin.

Some investors therefore worry that T-Mobile USA could become a cash-draining problem.

And matters are not helped by the fact that Telefonica SA in December 2011 said it would be cutting its dividend. Deutsche Telekom dividend :

Telefonica SA’s first dividend cut in a decade highlighted the extent to which Europe’s sovereign debt crisis has hit Spain’s largest telecommunications company. The 14-percent cut in the 2012 dividend furthermore was followed by news of a dividend cut at Telekom Austria AG.

Telekom Austria Group said it would cut dividends for 2011 and 2012 in half, from EUR 0.76 per share to EUR 0.38 per share. As of 2013, the payout ratio remains at 55 percent of free cash flow to the extent that the dividend does not lead to a deterioration of the stock price. Telekom Austria cuts dividend

Among the most dangerous steps a dividend-paying company can take is to cut the dividend. In fact, even the threat of a dividend cut can affect a public company’s stock price. Impact of dividend cuts

Unless DT somehow can manage to sell T-Mobile USA, or otherwise create a more liquid asset by going public, it will have to invest heavily. And that will almost certainly lead to a dividend cut.

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