Changes in the composition of the Group and other transactions

In the 2018 financial year, Deutsche Telekom conducted the following transactions, which had or will have an impact on the composition of the Group. Other changes to the composition of the Group not shown here were of no material significance for Deutsche Telekom’s consolidated financial statements.

Acquisition of Layer3 TV, Inc.

The agreement signed by T-Mobile US on November 9, 2017 to acquire 100 percent of the shares in online TV provider Layer3 TV, Inc. was consummated on January 22, 2018. T-Mobile US expects the acquisition to further strengthen its TV and video portfolio. Layer3 TV has been included in the consolidated financial statements as a fully consolidated subsidiary since the acquisition date. The consideration paid at the acquisition date amounts to EUR 0.3 billion in cash.

The fair values of the acquired assets and liabilities recognized at the acquisition date mainly relate to an identifiable intangible asset of EUR 0.1 billion in connection with technology developed by Layer3 TV. This asset will be amortized over an expected useful life of five years. Goodwill of EUR 0.2 billion was recognized for the difference between the consideration paid and the balance of the identifiable assets acquired and the liabilities assumed at the acquisition date, measured at fair value. This item is mainly based on the industry expertise of the acquired management team as well as the other non-separable intangible assets identified. Under local tax law, this goodwill is not recognized and is thus not tax-deductible.

Acquisition of UPC Austria GmbH

On December 22, 2017, T-Mobile Austria agreed to acquire a 100 percent stake in UPC Austria GmbH and its subsidiaries, taking into account non-controlling interests. The European Commission approved the deal on July 9, 2018 and the transaction was consummated on July 31, 2018.

With more than 1,000 employees, UPC Austria is a leading provider of communication and entertainment services in Austria’s telecommunications sector. Through its high-performance coaxial and fiber-optic cable infrastructure, the company provides more than half a million consumers and business customers with fast, easy access to the digital world. By acquiring UPC Austria, T-Mobile Austria is set to become a leading broadband provider in the Austrian market.

Since the acquisition date of July 31, 2018, UPC Austria has been included in the consolidated financial statements as a fully consolidated subsidiary. The purchase price allocation and the measurement of the UPC Austria group’s assets and liabilities as of July 31, 2018 were finalized by December 31, 2018.

The cash consideration transferred at the date of acquisition was EUR 1.8 billion and took into account a negative amount of EUR 0.1 billion in adjustments to net working capital and net debt in accordance with corresponding provisions in the purchase agreement.

The fair values of the UPC Austria group’s acquired assets and liabilities recognized at the acquisition date are presented in the following table.

The acquired goodwill of EUR 553 million to be recognized in Deutsche Telekom’s consolidated statement of financial position is calculated as follows:

The purchase option for the non-controlling interests in UPC Telekabel Wien represents in substance present access to the benefits of the shares. As such, following the business combination, the non-controlling interests are presented as if they had already been purchased. Accordingly, the acquired liabilities also include the liabilities to the minority shareholder measured at fair value.

Goodwill is influenced by synergy effects that arise from the future business potential attributable to the company’s position as an integrated provider of telecommunications services in Austria after the acquisition. Under local tax law, it is not recognized and is thus not tax-deductible. The purchase price allocation did not result in any deferred taxes on goodwill, nor will it in the future.

The customer base was measured using the multi-period excess earnings method. Under this method, the fair value of the customer base is determined by calculating the present value of profit/loss after taxes that can be assigned to the existing customers. The customer base is amortized over the useful life of 5 to 12 years.

The carrying amounts of the acquired receivables are based on the fair values. The gross amounts of the trade receivables amount to EUR 14 million. No material contingent liabilities have been identified.

T-Mobile Austria and the seller also concluded a transitional service contract covering the continuation and provision of certain services by the seller as well as management of the processes of separation from the seller and integration in T-Mobile Austria’s organization. Fixed and/or usage-based charges are payable under this contract. The contract came into force on the date of transfer (July 31, 2018) and ends on the day the last service period expires. Some service periods last up to four years. The purchased services are expensed immediately under goods and services purchased and other operating expenses.

No material transaction-based costs were incurred by December 31, 2018.

Deutsche Telekom’s net revenue increased by EUR 149 million in the reporting period due to the acquisition of UPC Austria. If the business combination had already taken place on January 1, 2018, net revenue of the Group would have been EUR 360 million higher. Deutsche Telekom’s net profit in the reporting year includes profit/loss before taxes of EUR 37 million from the UPC Austria group. If the business combination had already taken place on January 1, 2018, the Group’s profit before taxes would have been EUR 72 million higher. The above information reflects the situation prior to any effects of the purchase price allocation.

Toll Collect

On May 16, 2018, Daimler Financial Services AG, Deutsche Telekom AG, and the Federal Republic of Germany reached an agreement to cease the Toll Collect arbitration proceedings. The settlement was notarized in early July 2018 and confirmed by the arbitral tribunal, bringing the arbitration proceedings to an end. The agreed settlement amount of around EUR 3.2 billion includes services previously provided to the Federal Republic of Germany. Daimler Financial Services AG and Deutsche Telekom AG have both agreed to make final payments of EUR 550 million each. These payments to the Federal Republic of Germany will be made on behalf of Toll Collect GbR in three tranches over the period until 2020; the first tranche was paid in the reporting year.

As it had announced in advance, the Federal Republic of Germany exercised its option as of September 1, 2018 to purchase 100 percent of the shares in the operating company, Toll Collect GmbH, when the operating agreement expired on August 31, 2018. Even after the acquisition of Toll Collect GmbH by the Federal Republic of Germany, the consortium Toll Collect GbR – comprising Deutsche Telekom AG, Daimler Financial Services AG, and Compagnie Financière et Industrielle des Autoroutes S.A. (Cofiroute) – continues to exist with an unchanged ownership structure.

The bank guarantees for third parties for a maximum amount of EUR 100 million that were issued during the term of the operating agreement expired as scheduled on October 15, 2018. The equity maintenance undertaking entered into by the aforementioned consortium members under the operating agreement remained in place until the Federal Republic of Germany assumed full control of Toll Collect GmbH, and was replaced as of August 31, 2018 by a guaranteed equity base of at least EUR 50 million for Toll Collect GmbH, depending on the date of transfer.

Changes in the composition of the Group

The composition of the Deutsche Telekom Group changed as follows in the 2018 financial year:

The following transactions will change the composition of the Deutsche Telekom Group in future.

Acquisition of Tele2 Holding N.V.

On December 15, 2017, Deutsche Telekom signed an agreement with the Tele2 Group on the acquisition of 100 percent of the shares in the telecommunications provider Tele2 Netherlands N.V. by T-Mobile Netherlands Holding B.V.. This transaction will establish a stronger, more sustainable provider of convergent fixed-network and mobile services on the Dutch market. Tele2 Group receives a purchase price in the form of a 25.0 percent stake in T-Mobile Netherlands and a cash component of EUR 190 million taking any retrospective adjustments to the purchase price into account. After the European Commission issued its approval without conditions on November 27, 2018, the transaction was consummated on January 2, 2019. Tele2 Netherlands has been included in Deutsche Telekom’s consolidated financial statements as a fully consolidated subsidiary since this date. Since the transaction was consummated so close to the date of preparing the consolidated financial statements, it is not yet possible to disclose information on the assets acquired and liabilities assumed from Tele2 Netherlands Holding N.V. or the goodwill resulting from the transaction.

Agreed business combination of T-Mobile US and Sprint

Together with their respective majority shareholders Deutsche Telekom AG and Softbank K.K., T-Mobile US and Sprint Corp. concluded a binding agreement on April 29, 2018 to combine their companies. Under the agreement, T-Mobile US will acquire all of the shares in Sprint. In return for every 9.75 Sprint shares, the company’s shareholders will receive one new T-Mobile US share without any additional cash contribution. On completion of the transaction, Deutsche Telekom will hold around 42 percent of T-Mobile US’ shares and Softbank around 27 percent, while the free float will account for about 31 percent. Due to the voting-rights agreement with Softbank, and to the fact that Deutsche Telekom has the right to appoint the majority of the members of the Board of Directors, T-Mobile US will continue to be included as a fully consolidated subsidiary in the consolidated financial statements. The larger T-Mobile US is expected to achieve cost and capital expenditure synergies with a net present value of around USD 43 billion (after integration costs). Around USD 15 billion has been budgeted for integration costs. The agreement is subject to approval by the authorities as well as other closing conditions.