Telekom's US concentration risk is increasing
Its fast-growing subsidiary T-Mobile US now accounts for two-thirds of Deutsche Telekom's consolidated operating profit. Even though investments in the USA were slightly reduced in the most recent quarter, the Bonn giant is continuing to commit fresh capital to its largest market. A total of 12 billion US dollars isn't a big chunk, considering the dimensions of the telecoms industry. Still, it's also not a small amount for Telekom, which is currently getting back into the comfort zone for its debt ratio, in order to secure its credit rating.
USA preferred
The acquisitions with which Telekom wants to expand its footprint in the market, and also the still barely touched fibre optic business in the USA, cannot come as a surprise to analysts. CEO Tim Höttges has made it clear for years that the investment environment in the United States appears to him to be significantly more advantageous than in Germany and Europe. Among other things, because the mobile communications market is so concentrated stateside with three nationwide providers, completely different returns on the capital invested are possible.
Nevertheless, Telekom's dependence on its US subsidiary undoubtedly also entails risks. It catches the eye every quarter when the group almost always adjusts its goals directly as a result of the dynamics at T-Mobile US. But the dependency has been steadily growing. A series of quarters with good profit development in the domestic German market does not change this.
Disruption as a risk
Even if the classic mobile communications business in the USA, as elsewhere, is of a utility nature and is therefore unlikely ever to be affected by cyclical fluctuations or external shocks, Telekom remains exposed to the risk of a disruptive event in the market. An example might be a large M&A deal by a competitor that strategically repositions itself and reshuffles the cards in the industry. In addition, it has already been shown in other countries that the barriers to market entry, even in capital-intensive mobile communications, are not so high that they deter newcomers with deep pockets, given the temptingly lucrative margins.
