News

Deutsche Telekom May Lose Bidders

2/20/2000 7:00 PM Eastern

Frankfurt, Germany -- After almost one year of
contemplating bids on its cable assets, German operator Deutsche Telekom A.G. may not sell
anything to the potential investors it's been in talks with.

The company has said that it will sell most of its huge
cable network, which reaches more than 18 million German homes. It had entered into
extensive negotiations with United Pan-European Communications N.V. (UPC) and Callahan
Associates International LLC, a company led by former U S West International head Richard
Callahan.

"All they did was grant an exclusive negotiating
period to companies like UPC and Callahan, but they led nowhere," a high-ranking
source familiar with the talks said.

Deutsche Telekom officials originally said they hoped to
sign the first of several sales agreements for the operations before the end of last year.

To prepare for those sales, the formerly state-owned
telecommunications company had split up its cable network into nine regional operating
companies, with plans to sell 75 percent stakes in each of the units to different
investors. The sales were expected to earn Deutsche Telekom more than $10 billion.

But industry sources have long expressed doubt over whether
Deutsche Telekom would ever go through with the sales. They speculated that the company
would ultimately try to keep the systems in order to control access to its network by
telephony and multimedia competitors, which rent capacity from it.

A source close to the discussions said that during the
talks with UPC and CAI, Deutsche Telekom declined to fully disclose its contracts with
other companies. For example, "We were not allowed to take a look at the contracts
with [The] Kirch Group on the digital bouquet on Premiere World," the source said.

Kirch's alliance with Deutsche Telekom is apparently
deepening. Last week, Deutsche Telekom bought 51 percent of Kirch's set-top-box
development company, Betaresearch GmbH. According to news reports, the deal is worth
almost 1 billion deutsche marks ($980 million). Betaresearch developed the so-called
digital d-box set top, which is used in more than 1 million Premiere World homes.

Deutsche Telekom board member Gerd Tenzer denied
speculation that the company won't sell off its systems. "Maybe already during
CeBIT we will be able to make the first announcements," he said, referring to the
German trade show that takes place later this month. He added that the government was
expected sometime this year to lower the tax Deutsche Telekom would have to pay on the
proceeds from any system sale.

If Deutsche Telekom moves to sell its systems, it may find
that some potential buyers have lost interest. UPC, for instance, is starting to buy
so-called net-level-4 operators, or systems that lease Deutsche Telekom's network for
channel distribution, but that are owned by other companies.

UPC recently bought Germany's No. 3 cable operator,
PrimaCom A.G., which has 700,000 subscribers. It is also considering building its own
fiber backbone in Germany, with a partner such as telephone company Mannesmann Arcor.

"Of course, this costs billions. But we also have to
pay this for the Telekom cable, plus the billions we need for upgrading the systems,"
a UPC source said. Upgrading the systems could cost an additional $3.03 billion, according
to Deutsche Telekom figures.

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