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Business

Telekom Moves to Cut Debt Burden

Deutsche Telekom AG announces a series of measures aimed at convincing investors that it's serious about dismantling its huge debt burden.

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The former telecoms monopolist said its supervisory board had approved a plan to hive off its business with antenna infrastructure (used for mobile telecommunications and directional radio) into a separate company, which will be open to new investors. Chief Finance Officer Karl-Gerhard Eick left open whether Telekom will be prepared to cede a majority stake in the new unit.

Telekom is hoping that the move will generate additional revenue for the dismantling of its debt burden. Eick said the group's recent review of the value of its property assets had shown considerable hidden reserves to be bound up with the antenna infrastructure. He estimated the value of these reserves at DM4 billion.

"We will find a buyer without any problem," Eick added, reasoning that there's already a strong demand for installations of this kind, and demand is set to get stronger as mobile-phone companies build up their third-generation networks.

But the antenna installations have one drawback for Telekom, in that they cannot be recorded to their full value in the balance sheet. As part of a revaluation of its real-estate assets, the value recorded against the installations in the closing balance for the year will be lower than that shown in the year-opening balance.

The company has carried out a full revaluation of its real-estate portfolio to enable it to sell real estate as part of its drive to reduce its 65 billion debt burden. Before it can sell items, the book valuations have to be as close to going market rates as possible. The group said its entire portfolio of real-estate assets now has a total value of DM33 billion.

Details of the revaluation were announced by Telekom earlier on Wednesday after it had passed on a copy of the relevant report public prosecutors in Bonn. Following complaints from disgruntled shareholders, the prosecutors are examining whether executives covered up the real value of the property assets during preparations for Telekom's 1996 initial public offering.

These complaints were filed after Telekom announced in February that it would take a charge of DM4 billion to write down the value of 11,527 items of real-estate assets on its 2000 balance sheet. These charges pushed down Telekom's 2000 net profit by some 3 billion euros.

Telekom said on Wednesday that, as part of the revaluation process, it will take an additional charge of DM900 million to write down the assets' value this year. Industry insiders said the write-down can be expected to burden Deutsche Telekom's 2001 net result by DM500 million once tax is taken into account.

Deutsche Telekom is expecting a loss for 2001, though it hasn't given a specific forecast. Analysts say the group would have to reckon with a loss of 2 billion euros even without the effect of the revaluations. The group reported a net profit of 5.9 billion euros in 2000.

The revaluation of 11,527 plots of land was undertaken by a team led by auditors Karlheinz Küting and Claus-Peter Weber. In the case of buildings, no need for valuation was seen.

Telekom said the revaluation of its real-estate assets is now complete. The value of the 11,527 plots, which was shown as DM13 billion in the balance sheet at the start of 1995, now stands at just above DM8 billion. But Eick stressed that the report confirms, not disproves, the accuracy of the 1995 report.

Crucial for Telekom's argument is that the auditors identified hidden reserves in its real-estate portfolio worth DM2.8 billion. If these are offset against the 4.9 billion reduction in the real estate's value, one is left with a figure of DM1.9 billion. This is less than 20% of the original valuation of DM13 billion, and a deviation of this size will be considered within acceptable limits by a court, auditor Küting said.

Küting said his team approached the revaluation of Telekom's real-estate assets with more diligence than it had ever before applied to a project of this kind. He said the report demonstrates that the charge of balance-sheet falsification is entirely groundless.

February's announcement of a DM4 billion revaluation of Telekom's assets led to a dramatic decline in its share price. The reaction to Tuesday's announcement looks set to be more restrained, if the day's share-price movement is anything to go by. Telekom stocks fell by 1.75% on a weak-tending market. And certainly, analysts had already been expecting a further revaluation.

Separately, Telekom announced on Wednesday that it had carried out further activity on the market for asset-backed securities. It said it had set up a new company, IRIS, as a special-purpose vehicle for this aspect of its business.

Telekom said it would be selling 2.4 billion euros worth of securities backed by telephone bills into IRIS each month over the next five years. As a first move, Telekom said it had sold 1.4 billion euros of securities into the new company, which would be issuing bonds in April. Because of their asset-backed status, these bonds would enable Telekom to carry out its refinancing at far more favorable rates than those associated with the standard corporate bonds that would otherwise be open to it.

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