1&1 Drillisch shares plunge after it reveals elevated Telefónica charges

German MVNO 1&1 Drillisch has significantly downgraded its earnings outlook after host network provider Telefónica plays tough in negotiations.

The Drillisch announcement was headlined ‘Substantial price increase from July 2020 onwards for the use of Telefónica’s network capacity. As a precaution EBITDA forecast 2020 reduced to approx. €600 million.’ EBITDA for the previous year was €683.5 million, so that’s a 14% decline.

On first impression this comes over like a unilateral hike in the wholesale rate by Telefónica Germany, which had previously been constrained by the terms of its merger with E-Plus back in 2014. However, the wording of the Drillisch announcement adds plenty of nuance to the narrative.

‘Despite the ongoing negotiations, yesterday, Telefónica has sent 1&1 Drillisch MBA MVNO-invoices for the advance service prices for July and August 2020 with the advance service prices that Telefónica considers to be applicable without making this subject to agreement in the negotiations,’ says the announcement.

‘Whereas, so far, the voice prices per minute and data prices per GByte were reduced steadily in the last five years based on the MBA MVNO Agreement, Telefónica now assumes consistently high voice prices per minute and data prices per GByte from July 2020 and for the following years. They shall be equivalent to the average prices in the period between 1 July 2019 and 30 June 2020 and no longer be reduced in the future.

‘Furthermore, certain, so far free of charge capacities for voice and SMS shall no longer exist. This, compared to the previous months, resulting price increase as from July 2020 and the future discontinuation of the annual price degression will result in annually substantially increasing additional costs, in particular due to the expected significant annual data growth.’

This makes it seem more like Telefónica had been compelled to steadily reduce prices, but now that it’s no longer compelled, it doesn’t see any reason to keep doing so. Negotiations are still ongoing, however, so maybe Telefónica sent this bill to act tough and now Drillisch is playing the victim with this pre-emptive profit warning.

Drillisch concludes by saying it reckons Telefónica’s new prices go against what was agreed back in the day and threatens to grass them up to the European Commission. Telefónica seems to be betting that won’t be a straightforward process and is determined to get as much cash as possible out of Drillisch while it can. Drillisch shares were down 27% on the news at time of writing.