7. Thorsten Langheim on Group Development – Deutsche Telekom's Capital Markets Day 2021 #DTCMD21

All right. I want to make it short, 30 minutes. I'm the only difference between a good weekend and this presentation. I look forward to this presentation because I get two beers. Beer number one is for wearing this jacket, and the second beer is coming a little later in any case. Let me come to this wonderful picture. Yesterday when I looked at the webpage of the Capital Markets Day, I picked up that there was one in 2010. In 2010 we had our full leader Tim presenting on the topic of efficiency and capital returns. We were number four in the market behind Vodafone, Telefonica, and Orange, our key competitors, and we had a burning platform in the U.S. Now today, if you look at it, we all look different. We wear fancy jackets and we are the number one in the European marketplace. And if you see this, we are almost the size of Orange, Telefonica, and Vodafone. Why do I show you this? I show you this because we are investors, we are shareholders, we are a management team that is in for the long haul. History is not always a good prediction for the future, but I think our track record is good and you can trust us.

If you look at my presentation, I want to leave three major things with you that you should remember. Number one: we have built the best tech portfolio in the sector, and this gives you earnings per share growth, free cash flow growth, and strategic optionality. We have no burning platform like in 2010. Number two: we will continue with what we have done over the last 10 years: active portfolio management and exploiting strategic optionality. In the U.S. we want to retain control. In Europe we will review strategic options for our towers and T-Mobile Holland, and I will explain to you in a minute why. Number three: we don't have a share price or chief share price officer. This management team has aligned interest with our shareholders. We won't shock you and we want to build out our lead. You can trust us.

This is my personal business card. It's kind of interesting to look at Capital Markets Days and see presentations. Everything can be interpreted as you have won, you have delivered your numbers. I'm just a simple number guy and I'm just looking at the numbers and want to be judged on this. We at Group Development are responsible for two things, and I think this is unique in the industry. Number one: we are responsible for the portfolio, for active portfolio management. I'm certainly not the most popular person in the group because we have trade-off discussions. We have to allocate capital, not on a first-come-first-serve basis, but on a risk-adjusted return basis. Second one: sometimes we run activities like in the past, Scout or Strato, or over the last three years towers, and fixing T-Mobile Holland, or building DT Capital Partners from scratch. We are the department for value creation. These are my most important metrics. Of course you will find further operational KPIs in the booklet, but I'm just focusing on this: 44 billion since our last Capital Markets Day in 2018 on the U.S. for DT shareholders alone, and the sum of the parts based on your best estimates of the value of T-Mobile Holland and GD Towers creating 10 billion of value. How we've done that you've seen on the right-hand side. We have done in-market consolidation because we believe in that. We have also set up assets for FMC capabilities, like in Austria by acquiring UPC, or just recently in Holland by teaming up with KKR and DT Cable Partners for building out fiber.

The result of our work I think is impressive. I still want to be humble because at the moment of your great success you sometimes overestimate the future, and this is the moment where you should be most vigilant. However, having said that, we have a fantastic portfolio standing on two major legs. Team U.S. on the left-hand side is our racehorse: 50 free cash flow grows, 18 billion of free cash flow in 2026. I think a very smart analyst has recognized mid-May that this level of free cash flow is almost representing the whole free cash flow of the European sector. But on the other hand we have a stable and steady workhorse for the digitization in Europe: this is our European business, which has delivered a three percent EBITDA growth. Christian will tell you in a minute what we see in the future. It's number one in revenues. Dwell on this, let me move on and give you a bit more detail on the three assets that we are kind of overlooking: T-Mobile U.S., Holland, and our towers.

This is a 10-year story. You cannot create value overnight and it's not coming to you as a present. It was a long and sometimes difficult journey. For us it's always important to get the right asset but also at the right price, not just a deal that looks great at announcement day. That takes time. Even when we get a deal done, we are always looking ahead. You have seen us negotiating a valuable call option on 45 million shares in the U.S. as a subsequent step to putting these wonderful companies together in the U.S. I very well remember the long journey that we had, starting with the AT&T break fee, the reverse merger to MetroPCS, selling our tower business to fund our top line and uncarrier moves, identifying a fantastic management team that invented the uncarrier, or saying no to Dish at a time when it was fancy to think about a media content skills to differentiate in wireless, or the 2016-2018 Ross and Rachel episode between Tim and Masa about we get engaged, we don't get engaged, which finally led to our transaction in 2018.

You may remember what I said in 2018: we have a 70 dollar stock with a free option on deal approval. This is a picture that I showed you at the Capital Markets Day in 2018, and we were celebrating. But to be honest, we were celebrating too early. In football there's a saying: 'after the match is before the match.' What followed were two tough years, tiring and frustrating at times. Let me look at this picture here. This is Tim and me outside the New York courthouse after the cross-examination by the state attorneys. It's fair to say that we looked a little bit like Waldorf and Stadler, frustrating and completely tired. To be honest, in 2018 we had no idea we needed two years with a lot of ups and downs to get to deal approval. Of course the heavy lifting has been done by the Team U.S. management team, by John, Mike, Braxton, and Dave Miller. But remedies are a tricky thing. They need to be balanced, not killing the merger but the merger benefits by addressing the competitive concerns to get to deal approval. So far so good. I honestly believe that Judge Marrero took the right decision, not only from my selfish position of shareholder value but also from the consumer perspective. If you look at the recent C-band auction and our and and and Verizon spending 45 billion on it, how on earth should we or Sprint have been able to compete as standalone companies? Moreover, last week's refocusing and shedding of some media assets by AT&T tells you a story about how competitive our merger is.

Since closing, another 12 months have passed. So what has happened since then? I'm just focusing on the stuff that we as a shareholder were focusing on, not on what Mike clearly claims as a strong operational performance and improvements over the last 12 months. Number one: we conducted a successful management transition from certainly one of the best management teams, if not in the U.S. alone, with John and Braxton leaving the firm, succeeded by Mike and Peter Oswaldek. We renegotiated as you know the exchange ratio, and we negotiated a valuable call option that we currently enjoy because it's at 101 dollars while the stock is shortly below 140. We have been conservative enough on synergies. We've learned our lessons out of MetroPCS, and we'd like to outperform expectations. You've seen that we have increased synergy estimates and that we have put T-Mobile U.S. in a position where even on a balance sheet basis they can compete with the big guys. The target price has been increased over the last 12 months from 102 to 106, which gives us great hopes that everything is going to improve in the future even further.

Looking at the share price three years ago, I showed you that our stake value has improved from 9 billion to 32 billion. Now we are at 76 billion. Let me stress a little and take a little bit of a pause. This is 67 billion value creation since 2013. That's a lot of value that has been created for us. It's 44 billion over the last three years. I'm not smart enough to judge, but has this been the most value creating transaction in turku land? I'm asking as Tim is always asking for bring me awards. We started together with collecting the largest break fee in history. We enjoyed a 4-to-3 consolidation in Europe without remedies. Maybe the future will tell. It may be too early to celebrate, but in two or three years hopefully this is being seen as one of the better transactions. Even in my old world of private equity, we would get a blouse two times money on an unlevered return in three years is not too shabby. Also for us as a German company it's a relief after the challenges that for example Bayer or Daimler experienced with U.S. M&A. To be honest, it's not given. People will know most of the big ticket M&A transactions go wrong. So far this team in the U.S. and we as shareholders have delivered on a good story. Why is that? The value comes from a strategic rationale that has been very compelling from the get-go. The C-band auction showed you how valuable the Sprint spectrum is, especially in the 5G world. We can build the best network far better than we would ever do it organically and by ourselves. If you look on the right-hand side, the implicit valuation of Sprint based on the exchange ratio was about 70 billion on an EV basis. Synergies are now at about 70 billion. The value of the spectrum that Sprint brings to the table based on the C-band auction implicit price is 64. On top of it, DT shareholders got customers, network, and EBITDA.

Now look forward. What does it mean for our shareholders? T-Mobile U.S. is a sustainable, well-positioned company. We believe there's a lot of further value creation in front of us. Therefore, retaining control is a priority. Most importantly, it will certainly be financially attractive. Having said that, control in itself is not a value. However, we'd like to be invested in good assets, and as shareholders we like to determine few things in order to avoid the Vodafone Verizon trap. We want to bring our expertise to the table when it comes to capital allocation, M&A, capital structure, and as we have demonstrated to you in the past, to pick the right team on the bus. There's plenty of optionality around our U.S. stake and we have time. There is no message today we want to increase to 50.1 percent tomorrow. We have three years. Who knows what SoftBank may do when the lock-up expires mid-2024. If they are not selling their shares, we have a proxy forever. However, if they sell, we have a roofer and we have a call option, so we could act earlier if we want to. On top of the call option on the 101 million shares, 45 million comes at 101 dollars. I think that's a good position we are in. Now look at the T-Mobile U.S. Capital Markets Day in February. Based on their own projections, they outlined and indicated a share buyback of 60 billion between 23 and 25. This gives us even more opportunity and choices: either enormous cash inflows if we keep our stake flat, or increasing our stake if we are not selling anything in the share buyback. We will figure something out like we figured out how to fix the 2016 burning platform T-Mobile Holland.

Let me move to our Dutch friends. Let's look at Tim and Christian in 2017 when they try to figure out who assumes responsibility for T-Mobile Holland. Whoever plays tennis and Christian is almost a pro on the tennis side knows what happens when the ball comes through the middle of the court when you play doubles: everybody's looking at each other and says it's yours. Guess who ended up taking the T-Mobile Holland ball? It won't mean so much to that. T-Mobile Holland was certainly in intensive care in 2017: very competitive four-player market, multiple MVNOs, a converge duopoly of KPN and Vodafone Ziggo. You may remember that at this moment in time in 2017, Vodafone was acquired by Zigo, and Zigo ditching us at the altar. What did we do? Drastic measures were required. First thing to do: align management with value creation via house restructuring. What do I mean by that? We introduced an innovative equity incentive scheme, and on the back of it we were able to hire one of the best management teams in the sector. Siren my friend Abelgaard and Johann Ansvar have been the key architects of this turnaround, a bit like John Ledger and Mike Zevat in the U.S. Combined with an equity incentive scheme that in the U.S. was a reverse merger into MetroPCS, aligning our interest. The rest was fairly simple: radical cost takeout, self-funded network improvement, copying Team U.S. such as unlimited. Then we applied our M&A playbook to create value: market consolidation, tower separation and monetizing it, a recent JV on building out fiber with KKR, exploiting remedies of the Vodafone Ziggo merger by acquiring the small fixed line business tools. Results are good: best network in the world as Claudia said, market leadership assumed on B2C mobile, and we have the fastest growing B2B business in Holland. We more than doubled free cash flow since hitting the trough in 2018. On top of it, we outperformed the competition, something that is always very important for Tim. The numbers speak for themselves. EBITDA growth between 2018 and 2020 has been 15 percent on the headline side including acquisitions, but even organically it's 5.3 percent CAGR. That stacks up very well in the European sector. Johan Ansvar, the former CEO of Yoigo or in Switzerland, would look at this and say 'Oh torsion, that looks like Real Madrid.' I say not true, it's Bayern Munich winning the ninth championship in a row. Here's my second beer. Johan promised me a beer for making a joke about Bayern. The problem is I don't know a joke about Bayern, but I know one about Real. I just want to share this with you for a second. A guy throws a coin on the pitch at San Bernardino. What is it? People are asking themselves: is that a missile on a player? Is it a takeover bid given the high debts of Real Madrid? I don't know. In any case, I have my second beer.

Look at the value creation. In 2018 we had a bid on the table by a private equity firm roughly at about 2 billion. If I look to your best guesstimates and we obviously monetized our towers, we are now at about 6 billion. The company is extremely well positioned. It has a fantastic team. It's not only the CEO, it's 2000 big fans that are working for T-Mobile Holland in that market. We have a path to FMC via the fiber JV. We will over deliver on the synergies on Tele2 but also on the simple acquisition that we recently done. We will as we said initiate a strategic review of that asset. Let me say one thing: I don't like the word monetize. What we want to do is crystallize, not monetize this company. This company deserves more than being monetized. It deserves to find a good partner for its next journey.

The second asset that we have in Group Development is towers. I called it our sleeping beauty in 2018. We spent a lot of time on it. We learned a lot. We did deals. We partnered with the smartest cookies in the European sector, with the likes of Celinex and we are done have. We certainly have done a fairly good job on improving the towers also on an operational level. How do we think about towers? Towers is a super attractive asset class. DT in specific is a gold standard. We have 9,000 ground-based towers. This is two times Vantage and four times American towers. We currently build 1500 new sites per annum, and we have significant co-location upside as DT is a single tenant on one third of our towers only. More carve-outs to come. We are obviously working on Czech and Slovakia. Our operational performance has been fairly good. People may not recognize that, but we have delivered the largest build-to-suit program in Europe over the last three years. We have built 5,000 towers. We have third parties with 25 percent revenue share on our towers. This is industry leading. Why are we there? Because we focus on this since 2017. We hired Bruno Jacob Feuerbon not because he was a CTIO of Deutsche Telekom for his technical skills, but everybody who knows Bruno knows that he's certainly one of the best CMOs that we have in the telco sector. Like in Holland, our cost focus has led us to achieve 60 percent EBITDA margins. On the other hand, let me say this: we have an unfair advantage. Our unfair advantage is Tim. You cannot build 5,000 towers if the CEO of Deutsche Telekom doesn't give you a helping hand on this.

Now look at this famous slide here. What can I say about this? I think it creates a lot of questions and excitement. But as you know us, we try and test a lot before we come to conclusions. We have been soul-searching of how to retain the unique value creation that towers present. We thought is coming early as we experience a different market structure in the U.S. where no MNO owns the towers. We saw the high tower valuations and we reviewed how to best participate. We looked at an IPO, partially monetizing our asset. We review driving tower consolidation ourselves, but this hits obviously against leverage guardrails. Moreover, there are clearly benefits of running an independent tower company. I think in due course our patience will pay off. Multiples have re-rated to U.S. levels, and most importantly MLA terms have moved significantly, protecting us as the anchor tenant on pricing and allowing to preserve network leadership. The market is moving into the final phase where tier one operators may consider their tower operations. Real Madrid versus Manchester City, Vodafone PSG, Totem and Bayern Munich us as well as some Americans at the gate may play out the champions league over the next two years. I think the time is ripe to review our options and use our asset as the kingmaker asset in the European consolidation. We have four major criteria: we want to have a premium valuation for a premium portfolio, we want to create balance sheet headroom, we want to have a favorable MLA, and ideally we continue to be exposed to this asset class. However, let me say this: there is no artificial deadline, and we will deliver when we think the time is right.

Let me move on to the final two slides. Going back to 2018, if you recall I said I want to be measured by magenta bars. My commitment is to increase asset value. T-Mobile U.S. is a 70 stock with a free option if the deal is approved. I showed you my Bundesliga league table, and you can guess where I'm going with this. This is us today. We have created a lot of value. T-Mobile U.S.: unprecedented transaction, massive value creation, and I think a lot of further upside. Holland: spectacular turnaround, more upside. DT towers: valuation doubled, MLA have improved. Our little company DT Capital Partners generated half a billion in capital gains, stellar IRRs, and based on that is successful in getting further funding. But we did not get everything right and we learned from our failures. At BT as I said at the last Capital Markets Day, we got our timing wrong. We thought hard about selling it, but like you we saw some value, so we remain patient as holders. As you can see in the UK, the stars are aligning for a much better performance of our investment in the UK marketplace.

That's my final slide, and here's my pitch to you. My pitch is DT is a 20 euro plus stock. I know it's difficult to trust me on this. In 2006, long time ago, I was preparing a meeting between my former employer Blackstone and the German finance ministry which was called the road to euro 20. Today, 15 years later, we are euro 17. So however, let me try at least to pitch my case on EPS growth alone. We will get there, but it may take some time. You know that we've traded between 13 to 15 times PE. Given the industry hiccups with cash flow warnings, capex warnings, reverse of big acquisitions, I understand your attitude or the attitude by investors: seeing is believing. So how can we bridge the time gap? As some of you have picked up, our sum of the parts does not stack up. The value of our stake in T-Mobile U.S. and the value that analysts subscribe to DT towers and T-Mobile Holland leaves Germany and Europe valued almost for free. We don't need a hedge fund to tell us this. This is another reason to review our ownership in those assets as seeing is believing.

Let me summarize my presentation. Please remember what I said up front: there are three reasons why we are different. Number one: we have an attractive portfolio. It's well balanced and it delivers industry-leading EPS growth. Number two: based on our strong portfolio, we have strategic optionality and we want to exploit this to bridge the time gap for share price appreciation. Number three: you can trust us as a team. We have aligned interest. We do care about share price and shareholder remuneration. I even made it now in 30 minutes in my time. I wore the jacket, I got two beers, and now I'm looking forward to the usual literature on a Friday afternoon which is the Patelko, a summary of events in the tech industry which we sometimes need because we are in this industry together. It needs sometimes a little bit of a funny moment given that it's tricky, unpredictable at times, and a hard one for investors. Thank you very much. Have a great weekend.