Deutsche Telekom head optimistic

Mr Ron Sommer, Deutsche Telekom's chief executive, is astonishingly cheerful. His industry is in tatters. On average, a large telecommunications operator has gone bust every six days for the past six months. His company is burdened by €65.5 billion (£51.5 billion) of net borrowings - more than Poland's foreign debt.

Its share price has fallen by 84 per cent - from more than €100 in March 2000 to below the level at which it was privatised in 1996.

But when you meet Mr Sommer, he is confident, smiling, and relaxed - happy even. Confidence is in his nature.

Since Mr Sommer, then a top Sony executive, was enlisted to steer the German monopoly's initial public offering, he has seen his share of challenges. His resignation has been rumoured in a series of crises, only for him to emerge stronger than ever.

But Mr Sommer's optimism is founded on analysis as well as temperament. The demise of Europe's small carriers leaves the field clearer for the former monopolies than at any time in recent years.

Deutsche Telekom can claim to be better positioned than most, including the French and British former monopolies. If any company in an industry crushed by indebtedness, questionable investments and dismal share prices is to see growth in the near future, it could well be Deutsche Telekom.

"The questions we have been asking ourselves are: 'Is our strategy right and is our execution right?' Our answer to date is: 'Yes on both accounts'," Mr Sommer says.

One strength is Deutsche Telekom's fixed-line business. At a time when the market's attention is focusing on mobile telecoms and the internet, T-Com, the internet and business services, contributes 43 per cent of total sales.

Most companies have spent their money creating a high-capacity fibre optic network that most people cannot access across standard copper wires. Deutsche Telekom, however, undertook one of the fastest deployments of integrated services digital network (ISDN) and asymmetric digital subscriber line (ADSL). These local connections enable people to use the broadband services that proponents of the new economy have so enthusiastically predicted.

"Back in 1995, we knew that voice telephony would be depressed because of how telecom liberalisation was shaping up in Germany. So we executed very steadily by digitising the whole country and making it ISDN-ready," says Mr Sommer.

"The result is that growth in access has compensated declining revenue from long-distance and international calls."

The fixed-line business alone, with its modest growth rates, would struggle to help Deutsche Telekom achieve Mr Sommer's objective of generating average annual growth of 14 per cent in operating profit and double-digit sales growth until 2004.

For that, Mr Sommer is depending on one of the group's most daring gambles: this year's $26 billion (€28 billion) acquisition of US mobile operator VoiceStream. The theory is that, while other European incumbents face a slowing and maturing mobile market, Deutsche Telekom's T-Mobile unit will continue to enjoy vigorous growth by tapping the less-developed US market.

Even without VoiceStream, T-Mobile achieved 20 per cent organic sales growth in the six months to the end of June. It more than doubled its earnings before interest, tax, amortisation and depreciation (EBITDA), contributing more to the group's profits growth than any other division.

VoiceStream will be a burden to the group's profit-and-loss account because of the high levels of goodwill to be amortised. Yet Mr Sommer believes the company, which he says will be profitable at EBITDA level next year, will be a determining factor in the company achieving its growth targets.

Even Deutsche Telekom's formidable net debt at the end of June, slightly above France Telecom and considerably higher than British Telecom levels, looks manageable. That is because the group can easily generate cash.

Mr Sommer predicts net debt will have fallen to €50 billion by end-2002 but this appears to hinge on the initial public offering of T-Mobile - an uncertain prospect at a time of stock market volatility.

Mr Sommer believes the company can cut its debt even without such a flotation. However, analysts fear such a highly leveraged business could struggle to keep investing in growth segments, which demand much capital.

Debt is one question hanging over Deutsche Telekom's future. The other is third-generation (3G) mobile services. Concerns about 3G grew this month when Vodafone said its projection for the minimum guaranteed speed would be 64kbps (kilobits per second), barely above that of an old-fashioned modem and, according to some analysts, insufficient to download music and video.

"3G is. . . on the verge of being deployed," admits Mr Sommer. "But you have never heard a nervous comment on 3G from us because we know the world needs bandwidth. We have seen this happening in the fixed-line sector with ADSL; it will not be any different for mobile applications.

"The problem is the European brain is very digital. People think 3G should come overnight, while it will take a long time to establish. By 2004, only 10 per cent of mobile customers will use 3G. But in 2010 all our German users will have it."

Persuading the sceptics will not be easy. One risk is that by listing its T-Mobile subsidiary, Deutsche Telekom may be selling its fastest-growing and potentially most profitable business.

And the group's decision to pay for VoiceStream through the issuance of 1.17 billion shares ensures the group's stock will remain depressed for the foreseeable future. It is no surprise that Mr Sommer's most pressing request to shareholders should be for patience. "You cannot run this company according to short-term (market) fluctuations," he says.