Deutsche Telekom's updated strategy leaves room for raising its T-Mobile US stake

At its annual capital markets day, DT said it has various ideas about what it could do with this money. On top of facilitating "general strategic flexibility", the telco said it could use the funds for share buybacks or increasing its stake in T-Mobile US.

It is the jewel in DT's crown, after all, and there is value to be derived from increasing its exposure to it. It would also represent a vote of confidence in T-Mobile's recently-updated strategy, which like its parent company, places AI very close to the heart of it.

DT became the majority shareholder in T-Mobile in April 2023, noting at the time that the value of its US arm had increased by €155 billion during the preceding decade.

In June of this year, DT exercised its remaining call options on T-Mobile shares held by SoftBank, bringing in a further 6.7 million shares for $99.51 per share – a veritable bargain compared to the $179.82 price tag on a T-Mobile share at the time. Today, those same shares cost north of $212.

For the first six months of the year, T-Mobile US also accounted for more than 65 percent of DT's EBITDA after leases (EBITDA-AL).

In short, there is a strong case for DT at least maintaining if not increasing its stake.

Actually doing that will cost money of course, and DT reckons that AI and automation, and ongoing fixed and mobile network expansion should bring home the bacon over the next few years.

Customer service processes in particular can be simplified and accelerated through the use of automated identification and documentation, and AI-based information requests, DT said. It noted that in Germany, complaints have fallen by around two thirds compared to 2020, and it hopes to continue in this vein with greater use of app-based self-service and AI-supported messenger services.

On the network side of things, DT aims to pass 2.5 million homes in Germany with fibre every year by 2027, bringing the total to 17.5 million. It expects to improve the take-up rate from 14 percent to 20 percent. It hopes to add 1 million FTTH customers in 2027, up from an expected 450,000 this year. For the rest of its European footprint, DT has set a target of passing 1 million premises per year, reaching 13.5 million by 2027.

When it comes to mobile, DT expects 5G population coverage in Germany to reach 99 percent, with 90 percent of sites capable of more than 1-Gbps downlink speeds. In Europe, the plan is to increase 5G coverage from 78 percent to 95 percent.

DT also hopes to generate an additional €1.5 billion of revenue from new services, including payment services for handset insurance, and various AI solutions for customers. It also hopes to grow membership of its Magenta Moments loyalty scheme – which stood at 3.2 million at the end of 2023 – by 50 percent-100 percent.

"We are initiating the next stage," said Tim Höttges, CEO of Deutsche Telekom. "In recent years, our strategy has made us the undisputed number one in Europe. We have achieved or even exceeded nearly all of our targets and are now worth more than all our peers on our domestic continent combined. We will build on this position in the future, for example, by further intensifying the use of artificial intelligence."

If DT can deliver on all the above, then it reckons it can grow group service revenue by 4 percent per year to 2027, and EBITDA-AL by 4 percent-6 percent. It has also targeted free cash flow of around €21 billion for 2027. Adjusted earnings per share (EPS) is expected to increase to €2.50, representing a compound annual growth rate (CAGR) of more than 11 percent.

DT has also raised its dividend for 2024 to €0.90 per share from €0.77 per share in 2023, and announced a €2 billion share buyback for 2025.All told, it's an optimistic update from one of Europe's heavy-hitters, and runs counter to the doom-and-gloom narrative surrounding the continent's telco sector at the moment. That said, it's easier to be optimistic when you get such a big helping hand from T-Mobile US.