Blackstone's Minority Investment in Deutsche Telekom

Seminar paper from the year 2011 in the subject Business economics - Investment and Finance, grade: -, Harvard University, course: Behavioral and Value Investing, language: English, abstract: 1. INTRODUCTIONOn 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 overviewDeutsche 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 detailsBlackstone 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 longterm 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.