1. INTRODUCTION
On 24 April 2006, the private equity company Blackstone acquired 4.6% of the shares of publicly listed German telecom incumbent Deutsche Telekom (DT) at a share price of €14 for a total of €2.7bn. According to Blackstone, DT was undervalued when compared to European peers.
This paper has three objectives:
1) To apply various established value investing valuation techniques to assess whether DT was indeed undervalued at Blackstone’s entry.
2) To explore which operational and share price performance Blackstone might have anticipated for DT in order to reach a typical private equity IRR of 25% over five years.
3) To review subsequent events and DT’s performance since Blackstone’s entry and to specify what would need to happen to at least recover Blackstone’s investment.
1.1 Company and shareholder overview
Deutsche Telekom is the German telecom incumbent and was Europe’s largest telecom operator with sales of €59.6bn in 2005. The company generated 57% of its sales in Germany, another 22% in other European countries (mainly the United Kingdom) and the remaining 20% in North America. In terms of business areas, mobile communications accounted for 48% of its revenues, broadband/fixed network made up 36% and business customers 15%.
DT’s largest shareholder was the German government which held 15.2% of DT’s shares directly and controlled another 17.3% via the German state-owned bank Kreditanstalt für Wiederaufbau (KfW). The remaining 63% were held by a fragmented institutional and private investor base.
1.2. Transaction details
Blackstone bought its stake directly from KfW at a 2.6% premium to DT shares’ trading price of €13.65, implying a total market capitalization of €58.8bn and an enterprise value of €97.4bn. In the fifth largest private equity investment ever observed in Germany, Blackstone agreed to a lock up period of two years to show its commitment as a long
term investor. In return, it received one seat on DT´s supervisory board and KfW agreed not to sell any further DT shares within one year. 85% of Blackstone’s total investment was financed with a margin loan provided by Deutsche Bank.
Inhaltsverzeichnis (Table of Contents)
- 1. INTRODUCTION
- 1.1. Company and shareholder overview
- 1.2. Transaction details
- 2. INTRINSIC VALUE AT ENTRY
- 2.1. Asset valuation
- 2.1.1. Graham & Dood net-net
- 2.1.2. Book value
- 2.1.3. Asset reproduction cost
- 2.1.4. Conclusion
- 2.2. Earnings power value
- 2.2.1. Cash flow adjusted earnings
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper aims to evaluate whether Deutsche Telekom (DT) was undervalued at the time of Blackstone's minority stake acquisition in 2006 using established value investing techniques. It explores Blackstone's anticipated performance expectations and reviews DT's subsequent performance to assess the investment's viability.
- Valuation of Deutsche Telekom using various value investing approaches.
- Analysis of Blackstone's expected return on investment (IRR).
- Assessment of Deutsche Telekom's post-acquisition performance.
- Examination of the market's perception of Deutsche Telekom's value.
- Application of different asset valuation methods (net-net, book value, reproduction cost).
Zusammenfassung der Kapitel (Chapter Summaries)
1. INTRODUCTION: This introductory chapter sets the stage by describing Blackstone's acquisition of a 4.6% stake in Deutsche Telekom (DT) in 2006 at €14 per share. It outlines the paper's three main objectives: to assess DT's valuation at the time of the acquisition using various value investing techniques; to explore Blackstone's anticipated operational and share price performance for DT to achieve a 25% IRR over five years; and to review DT's performance since the acquisition and determine the conditions for Blackstone to at least recover its investment. The chapter also provides a brief overview of DT's business, shareholder structure (highlighting the significant government stake), and details of the transaction with KfW.
2. INTRINSIC VALUE AT ENTRY: This chapter delves into the valuation of Deutsche Telekom at the time of Blackstone's investment. It employs a three-step approach (detailed in Greenwald et al.'s "Value Investing") to determine DT's intrinsic value. The first step involves asset valuation using Graham & Dodd's net-net, book value, and reproduction cost methods. The second step calculates the earnings power value. The third (partially presented in the excerpt), addresses the potential value of DT's growth. The analysis reveals inconsistencies and limitations in using the Graham & Dodd net-net approach for DT. The book value analysis shows a decreasing market-to-book ratio, suggesting growing market skepticism. The reproduction cost approach, however, indicates that DT was trading at a significant discount to its reproduction asset value, potentially supporting Blackstone's undervaluation claim. This chapter lays the groundwork for understanding the valuation discrepancies and provides crucial context for the investment decision.
Schlüsselwörter (Keywords)
Deutsche Telekom, Blackstone, Value Investing, Asset Valuation, Earnings Power Value, Market Capitalization, Private Equity, IRR, Undervaluation, Financial Analysis, Reproduction Cost, Book Value, Graham & Dodd, Share Price Performance, European Telecom, Mergers and Acquisitions.
Deutsche Telekom (DT) Valuation and Blackstone Investment: Frequently Asked Questions
What is the main focus of this paper?
This paper analyzes whether Deutsche Telekom (DT) was undervalued when Blackstone acquired a minority stake in 2006. It uses established value investing techniques to assess the investment's viability, examining Blackstone's expected returns and DT's subsequent performance.
What valuation methods are used in this analysis?
The analysis employs various value investing approaches, including:
- Asset valuation: Graham & Dodd net-net, book value, and asset reproduction cost.
- Earnings power value.
These methods aim to determine DT's intrinsic value at the time of Blackstone's investment.
What were Blackstone's investment objectives?
Blackstone aimed to achieve a 25% internal rate of return (IRR) over five years on their investment in DT. This involved anticipating both operational improvements and share price appreciation.
What are the key findings regarding Deutsche Telekom's valuation?
The analysis reveals inconsistencies in using the Graham & Dodd net-net approach for DT. Book value analysis shows a decreasing market-to-book ratio, suggesting market skepticism. However, the reproduction cost approach suggests DT was trading at a significant discount to its reproduction asset value, potentially supporting Blackstone's undervaluation thesis.
What aspects of Deutsche Telekom's performance are examined?
The paper assesses DT's post-acquisition performance to determine whether Blackstone's investment met its objectives and at least recovered its initial investment. This includes examining the market's perception of DT's value.
What is the structure of the paper?
The paper is structured into chapters covering an introduction outlining the acquisition and objectives, a detailed intrinsic value assessment at the time of investment, and a summary of findings. A table of contents and keywords are also provided.
What are the key takeaways from the chapter summaries?
The introduction establishes the context of Blackstone's acquisition and the paper's objectives. The chapter on intrinsic value delves into the application of various valuation methods, highlighting inconsistencies and limitations, and laying the groundwork for understanding the valuation discrepancies surrounding the investment decision.
What keywords are associated with this analysis?
Keywords include Deutsche Telekom, Blackstone, Value Investing, Asset Valuation, Earnings Power Value, Market Capitalization, Private Equity, IRR, Undervaluation, Financial Analysis, Reproduction Cost, Book Value, Graham & Dodd, Share Price Performance, European Telecom, and Mergers and Acquisitions.
- Quote paper
- Robert Motzek (Author), 2011, Blackstone's minority investment in Deutsche Telekom, Munich, GRIN Verlag, https://www.grin.com/document/182128
