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.
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
2.2.2. Weighted average cost of capital
2.2.3. Earnings power and franchise value
2.2.4. Conclusion
2.3. Value of growth
2.3.1. DT Profit & loss
2.3.2. Blackstone dividend and interest payments
2.3.3. Blackstone exit and returns
2.3.4. Conclusion
3. SUBSEQUENT EVENTS
3.1. Management
3.2. Share price performance
3.3. Financials and share price needed for recovery of investment
Objectives and Core Themes
This paper examines whether Deutsche Telekom (DT) was fundamentally undervalued at the time Blackstone acquired its minority stake in 2006. The research evaluates Blackstone’s investment thesis by applying established value investing techniques—specifically asset valuation, earnings power analysis, and growth projections—to determine if the entry price was justified and how operational changes were intended to unlock shareholder value.
- Application of Graham & Dodd asset-based and earnings power valuation models.
- Benchmarking of DT’s operational performance against major European telecom peers.
- Analysis of Blackstone’s private equity investment strategy, including margin loan financing and governance influence.
- Assessment of post-investment management changes and their impact on share price and profitability.
- Evaluation of the investment's actual performance and the thresholds required for recovery.
Excerpt from the Book
2.1.3. Asset reproduction cost
The reproduction cost approach tries to estimate how much it would cost a potential competitor to replicate the company to be valued. To do so, the asset side of the company’s balance sheet was taken as a starting base and then adjusted for several positions. As shown in Table 3, four adjustments were made to DT’s asset book values in order to arrive at the total reproduction value of assets of €171.8bn.
First, €0.787bn of impairment losses on loans and receivables were added to trade and other receivables because any new entrant would face similar or even higher allowances for bad debt on his receivables account. Second, current recoverable income taxes were expected to be cashed in within one year and hence discounted to present value. Third, non-current deferred tax assets were discounted to present value. Almost all of these tax credits were to expire after five years or later. Earnings before taxes in 2005 amounted to €6.2bn. As the combined income tax rate for DT accounted for 39%, without tax credits DT would have had to pay taxes of €2.4bn in 2005. For the present value calculation of deferred tax assets it was hence assumed that DT would make use of 1/3 of its total tax credits of €7.552bn in each of the next three years, which after a corresponding present value calculation resulted in a total discount to book value of €0.846bn. Fourth, according to B. Greenwald et al. (2001) new entrants would have to establish or buy customer relationships that are not accounted for on balance sheets. For this reason, the authors suggest adding one to three times annual selling, general and administrative expenses to the reproduction costs of the assets.
Summary of Chapters
1. INTRODUCTION: Outlines the transaction details of Blackstone’s 2006 minority stake acquisition in Deutsche Telekom and defines the three primary research objectives.
2. INTRINSIC VALUE AT ENTRY: Provides a technical valuation of DT using asset-based approaches, earnings power analysis, and growth modeling to assess whether the company was undervalued.
3. SUBSEQUENT EVENTS: Reviews the performance of DT following the investment, including management changes, share price evolution, and the financial requirements for Blackstone to achieve a break-even.
Keywords
Deutsche Telekom, Blackstone, Value Investing, Private Equity, Asset Valuation, Earnings Power Value, Reproduction Cost, Margin Loan, Shareholder Value, Operational Performance, Telecom Industry, Investment Return, IRR, Corporate Governance, Financial Benchmarking
Frequently Asked Questions
What is the fundamental focus of this paper?
This paper examines the valuation of Deutsche Telekom at the time of Blackstone's 2006 entry to determine if the firm was truly undervalued and how the private equity investor intended to generate returns.
What are the central themes discussed?
The core themes include the application of value investing frameworks (Graham & Dodd), benchmarking operational efficiency against European peers, and evaluating the risks and outcomes of a high-leverage private equity investment.
What is the primary objective of this research?
The primary goal is to validate if DT was undervalued at entry, explore the anticipated performance metrics required for a target IRR, and review the actual outcomes for Blackstone’s investment.
Which scientific methods are employed?
The author utilizes standard value investing techniques, specifically the reproduction cost approach, earnings power value (EPV) calculations, and discounted cash flow modeling.
What does the main body cover?
The main body systematically applies three-step valuation approaches, assesses the "franchise value" of the company, and models the potential exit scenarios based on P/E multiples and operating margin assumptions.
Which keywords best characterize this work?
Key terms include Value Investing, Blackstone, Deutsche Telekom, Private Equity, Earnings Power Value, and Asset Reproduction Cost.
How significant was the margin loan to Blackstone’s investment strategy?
The margin loan was highly significant; since Blackstone financed 85% of its investment with this loan, it only required a 7% share price appreciation to achieve a substantial IRR of 24.4%.
Why was DT’s CEO Kai-Uwe Ricke replaced shortly after the investment?
Ricke was replaced by Rene Obermann following a profit warning; the move was driven by Blackstone’s demand for a leader capable of implementing more aggressive and rapid cost-reduction measures.
- Arbeit zitieren
- Robert Motzek (Autor:in), 2011, Blackstone's minority investment in Deutsche Telekom, München, GRIN Verlag, https://www.grin.com/document/182128
