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 investment in 2006 using various value investing techniques. It explores Blackstone's anticipated performance expectations and reviews DT's subsequent performance to assess the viability of recovering the investment.
- Valuation of Deutsche Telekom using different value investing approaches.
- Analysis of Blackstone's expected return on investment (IRR).
- Assessment of Deutsche Telekom's performance following Blackstone's investment.
- Examination of the factors contributing to Deutsche Telekom's market valuation.
- Evaluation of asset valuation methods, including book value and reproduction cost.
Zusammenfassung der Kapitel (Chapter Summaries)
Chapter 1: Introduction provides background information on Blackstone's acquisition of a minority stake in Deutsche Telekom and outlines the paper's objectives. It gives an overview of Deutsche Telekom's business structure and shareholder composition. The transaction details of Blackstone's investment are described, including financing and lock-up periods.
Chapter 2: Intrinsic Value at Entry applies a three-step valuation approach to assess Deutsche Telekom's intrinsic value at the time of Blackstone's entry. This section begins with an analysis of DT’s asset valuation using Graham & Dood’s net-net, book value, and reproduction value methods. The chapter then moves on to calculate the earnings power value. This section concludes by comparing the market value and reproduction value of the company’s assets.
Schlüsselwörter (Keywords)
Deutsche Telekom, Blackstone, Value Investing, Asset Valuation, Earnings Power Value, Market Valuation, Private Equity, Return on Investment (IRR), Telecommunications.
- Quote paper
- Robert Motzek (Author), 2011, Blackstone's minority investment in Deutsche Telekom, Munich, GRIN Verlag, https://www.grin.com/document/182128
