Changes in the composition of the Group and other transactions

In the 2020 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.

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. On July 26, 2019 and on February 20, 2020, further conditions for the business combination were agreed. The transaction was consummated on April 1, 2020. Prior to this, the approvals required from the national and regional regulatory and antitrust authorities and courts in the United States had been obtained and additional closing conditions met. Most recently, on April 16, 2020, the business combination was approved by the California Public Utilities Commission (CPUC). As a consequence of the business combination, T‑Mobile US took over all shares in Sprint. Sprint is a U.S. telecommunications company which offers a comprehensive range of wireless and wireline communications products and services. The “new” T‑Mobile US will successfully drive forward its Un-carrier strategy and step up the 5G network build-out. This provides a much stronger basis for T‑Mobile US to significantly expand nationwide coverage and to extend its mobile network capacities, which translates into clear potential for sustained customer growth. The business combination will increase the market share of the “new” T‑Mobile US and is expected to generate synergies and economies of scale.

The business combination of T‑Mobile US and Sprint was executed by means of a share exchange without a cash component (all-stock transaction). For every 9.75 Sprint shares held, the Sprint shareholders, with the exception of SoftBank, received one new share in T‑Mobile US in return. Pursuant to a supplementary agreement dated February 20, 2020, SoftBank agreed to surrender to T‑Mobile US immediately, for no additional consideration, an aggregate of 48,751,557 ordinary shares in T‑Mobile US, received in connection with this transaction, such that SoftBank received one new share in T‑Mobile US for every 11.31 Sprint shares. Taking these adjustments into account, a total of 373,396,310 new ordinary shares in T‑Mobile US were issued to Sprint shareholders.

The preliminary consideration transferred is comprised as follows:

Based on the closing T‑Mobile US share price of USD 83.90 as of March 31, 2020 – which was the most recent publicly available closing price at the time of consummation – the total value of T‑Mobile US ordinary shares issued in exchange for Sprint ordinary shares was USD 31.3 billion (EUR 28.6 billion). In addition, one component of the consideration transferred was the replacement of share-based remuneration for certain Sprint employees for services provided prior to the business combination and contingent consideration payable to SoftBank. The contingent consideration results from the agreement concluded on February 20, 2020 that if the trailing 45-day volume-weighted average price of the T‑Mobile US ordinary share at any time during the period commencing on April 1, 2022 and ending on December 31, 2025 reaches or exceeds the value of USD 150.00, then T‑Mobile US will issue to SoftBank for no additional consideration 48,751,557 ordinary shares, i.e., the number of shares that SoftBank surrendered to T‑Mobile US in the course of the closing of the transaction. The Monte Carlo simulation method was used to measure the contingent consideration. The main inputs and assumptions are the volatility of 28.5 %, the risk-free interest rate of 0.44 %, the period for fulfillment of conditions, the 45-day volume-weighted average price per ordinary share of T‑Mobile US, and the corresponding share price at the date of acquisition. Thus, the maximum value of the undiscounted contingent consideration equals the number of shares to be transferred multiplied by the price at the time the contingency is met. The consideration transferred is reduced by a pro rata reimbursement of costs by SoftBank to Deutsche Telekom related to the fulfillment of closing conditions vis-à-vis the CPUC. The financing structure was also reorganized in the course of combining the businesses of T‑Mobile US and Sprint. Immediately after the transaction, liabilities of the former Sprint totaling USD 9.8 billion (around EUR 8.9 billion) were repaid, of which USD 7.4 billion (around EUR 6.8 billion) fell due pursuant to a binding change-in-control clause. The amounts repaid are included in current financial liabilities as of the date of consummation and are recognized, in the statement of cash flows as of December 31, 2020, under net cash used in investing activities (mandatory repayments) and net cash from/used in financing activities (optional repayments). Thus the total costs of the acquisition, including the mandatory repayment of financial liabilities as of the acquisition date, amounted to EUR 37.4 billion.

On completion of the transaction, Deutsche Telekom and SoftBank held approximately 43.6 % and 24.7 %, respectively, and other shareholders approximately 31.7 % of the shares in the “new” T‑Mobile US. Due to a proxy agreement concluded with SoftBank and the fact that persons nominated by Deutsche Telekom hold a majority on the Board of Directors of the new company, T‑Mobile US will continue to be included in the consolidated financial statements of Deutsche Telekom as a fully consolidated subsidiary.

The purchase price allocation and the measurement of Sprint’s assets and liabilities at the acquisition date had not been fully finalized as of December 31, 2020. The outstanding measurement issues mainly relate to taxes and contingent liabilities.

The fair values of Sprint’s acquired assets and liabilities are presented in the following table:

The acquired intangible assets mainly comprise FCC spectrum licenses and customer relationships, which were measured at fair value in the amount of EUR 41,629 million and EUR 4,481 million, respectively. Spectrum licenses were measured using the greenfield method. Under the greenfield method, the value of the intangible asset is determined using a hypothetical cash flow scenario. The scenario projects the development of an entity’s operating business on the assumption that the entity owns only this intangible asset at inception. FCC spectrum licenses have an indefinite useful life. The multi-period excess earnings method was used to measure customer relationships. Under this method, the fair value of the customer base is calculated by determining the present value of earnings after tax attributable to existing customers. The expected useful life of customer relationships is eight years on average. Other intangible assets include, among other things, limited-term spectrum leases, the measurement of which includes the contractual payment obligations and also reflects the extent to which contractual terms are favorable compared to current market values. The average remaining lease term at the acquisition date was 20 years for non-cancelable leases, generally with a term of 30 years, and seven years for cancelable leases, generally with a minimum term of 10 years.

The fair value of the acquired trade and other receivables amounts to EUR 2,929 million. The gross amount of trade receivables totals EUR 3,081 million, of which EUR 152 million is expected to be bad debt.

In the fourth quarter of 2020, measurement adjustments were made to the acquired assets and liabilities, which primarily related to the following issues. The measurement of intangible assets and corresponding payment obligations arising from spectrum leases is based on the remaining minimum lease terms for a large number of individual leases as of the acquisition date. The detailed contract analyses required for this were completed as of December 31, 2020. Compared to the provisional measurement, which for simplification purposes was based on an identical maximum term of 30 years (including extension options) for all leases, this resulted in a decrease in the carrying amount of the intangible assets of EUR 0.8 billion, a decrease in the carrying amount of the financial liabilities of EUR 0.7 billion, and an increase in goodwill of EUR 0.1 billion. The measurement of certain leased cell towers was also completed, resulting in a decrease in the carrying amount of property, plant and equipment and a corresponding increase in goodwill of EUR 0.5 billion.

The acquired goodwill of EUR 8,684 million is calculated on a preliminary basis as follows:

Non-controlling interests participated fully in the transaction by means of the share exchange. As a result of the issuance of T‑Mobile US ordinary shares to the former Sprint shareholders, the total non-controlling interest increased. The preliminary carrying amount of the cumulative non-controlling interests in T‑Mobile US was calculated on the basis of the revalued interests in the shareholders’ equity of T‑Mobile US and was EUR 34.7 billion as of April 1, 2020 (December 31, 2019: EUR 11.0 billion) based on the preliminary purchase price allocation. Since the shares issued to the former Sprint shareholders as part of the share exchange are measured at fair value, the full goodwill method was applied. The preliminary goodwill calculated using this method comprises the synergies anticipated in connection with the acquisition, expected new customer additions, and the combined workforce. No part of the recognized goodwill is deductible for income tax purposes.

Transaction-related costs totaling EUR 0.2 billion were incurred in the Group in the 2020 financial year (in the prior year: EUR 0.1 billion). These mainly comprised legal and consulting fees and are included under other operating expenses.

Deutsche Telekom’s net revenue increased by EUR 18.0 billion in the reporting period due to the business combination of T‑Mobile US and Sprint. Net profit for the reporting period includes an effect from Sprint’s profit before income tax and before non-controlling interests of EUR 0.4 billion. If the business combination had taken place at the beginning of the 2020 financial year, net revenue and consolidated profit before non-controlling interests would have been respectively EUR 5.6 billion and EUR 0.3 billion higher than reported. These effects are based on estimates and they neither represent the actual consolidated figures of the Group if the transaction had taken place on January 1, 2020, nor do they anticipate future consolidated results.

On July 26, 2019, T‑Mobile US, Deutsche Telekom, Sprint, SoftBank, and the U.S. satellite TV operator DISH Network Corp. entered into an agreement, subject to specific conditions, with the U.S. Department of Justice (DoJ), which is material for the future structure of the new T‑Mobile US. Under this agreement, following the business combination of T‑Mobile US and Sprint, Sprint’s prepaid business was sold as part of an asset deal to DISH for around USD 1.4 billion (EUR 1.2 billion), taking into account provisional working capital purchase price adjustments. The transaction was consummated on July 1, 2020. The agreement also includes the sale of part of the 800 MHz spectrum held by Sprint to DISH for approximately USD 3.6 billion. The sale of the spectrum is subject to approval by the regulatory authority, to be applied for after three years following the closing of the business combination of T‑Mobile US and Sprint, and to additional closing conditions. For two additional years following the closing of the spectrum sale, T‑Mobile US will have the option to lease back, as needed, a portion of the spectrum.

On June 22, 2020, SoftBank and Deutsche Telekom agreed that SoftBank is permitted to sell 198,314,426 ordinary shares of T‑Mobile US with a total value of more than USD 20 billion. The agreement ensures that Deutsche Telekom retains control of T‑Mobile US. SoftBank’s share is therefore reduced to approximately 8 %. In return, Deutsche Telekom receives call options from SoftBank on a total of 101,491,623 ordinary shares of T‑Mobile US, which can be exercised until June 22, 2024. The subsequent sales of the shares held by SoftBank reduced the proportion of T‑Mobile US shares for which Deutsche Telekom can exercise voting rights to around 52.5 % as of August 5, 2020. As of December 31, 2020, Deutsche Telekom held around 43.4 % of the shares in T‑Mobile US, SoftBank around 8.6 %, and around 48.0 % were in free float. The proportion of T‑Mobile US shares for which Deutsche Telekom can exercise voting rights totaled around 52.3 % as of December 31, 2020.

For further information, please refer to the section “Group organization” in the combined management report and to Note 41 “Financial instruments and risk management.”

Sprint is party to a variety of agreements with Shenandoah Personal Communications Company (Shentel), pursuant to which Shentel is the exclusive provider of Sprint wireless communications network products in certain parts of several U.S. states that are home to approximately 1.1 million subscribers. Pursuant to one such agreement, Sprint was granted an option to purchase Shentel’s wireless telecommunications assets. On August 26, 2020, Sprint exercised its option by delivering a binding notice of exercise to Shentel. The purchase price for the Shentel wireless telecommunications assets to be purchased by Sprint is determined through the valuation process prescribed in the agreement. On February 1, 2021, the valuation process was completed. The parties are negotiating the remaining outstanding terms of a definitive agreement to govern the purchase of Shentel’s wireless telecommunication assets and expect the transaction to close in the second quarter of 2021 after satisfying customary conditions to closing. The base purchase price of the wireless telecommunication assets is USD 1.9 billion, subject to certain other purchase price adjustments prescribed by the agreement as well as additional purchase price adjustments agreed by the parties.

Acquisition of Simpel by T‑Mobile Netherlands

On October 16, 2020, T‑Mobile Netherlands B.V. signed an agreement for the acquisition of 100 % of the shares in Complex Bidco. B.V., including its 100 % share in the Dutch MVNO and SIM provider Simpel.nl B.V. Simpel sells SIM-only subscriptions through its own website and currently has around 1 million customers. It has been using the T‑Mobile Netherlands network since 2014. On November 16, 2020, the Dutch Authority for Consumers and Markets approved the acquisition without conditions. The acquisition was closed on December 1, 2020. Complex Bidco. B.V. including Simpel.nl. B.V. has been included in Deutsche Telekom’s consolidated financial statements since December 1, 2020.

The consideration transferred is comprised as follows:

The purchase option resulted from the call option agreement concluded in July 2019, which secured T‑Mobile Netherlands the right to acquire 100 % of the shares in Complex Bidco. B.V. including its 100 % stake in Simpel.

The purchase price allocation and the measurement of Simpel’s assets and liabilities at the acquisition date were still provisional as of December 31, 2020. The fair values of Simpel’s acquired assets and liabilities recognized at the acquisition date are presented in the following table:

The customer base was measured using the multi-period excess earnings method. Under this method, the fair value of the customer base is calculated by determining the present value of earnings after tax attributable to existing customers. The customer base is amortized over the remaining useful life of around 8 years. The brand was measured using the license price analogy method. Under this method, the value of the brand is calculated by making an assumption about which license costs would be notionally payable if the company did not own the relevant asset. The brand is amortized over the remaining useful life of 10 years.

The carrying amounts of the acquired receivables are based on the fair values. The gross amounts of the receivables amount to EUR 6 million. No material contingent liabilities have been identified.

The deferred tax liabilities comprise the tax effect on the temporary differences between the fair value of the different assets and liabilities on the one hand, and the respective carrying amount for tax purposes on the other.

The acquired goodwill of EUR 196 million is calculated as follows:

Deutsche Telekom uses the full goodwill method. The goodwill reflects the value of new customer additions anticipated in connection with the acquisition. No part of the recognized goodwill is deductible for income tax purposes.

Transaction-related costs totaling EUR 2 million were incurred in the Group in the 2020 financial year. These mainly comprised legal and consulting fees and are included under other operating expenses.

Deutsche Telekom’s net revenue increased by EUR 10 million in the reporting period due to the acquisition. Net profit for the reporting period includes Simpel’s total profit before non-controlling interests of EUR 2 million. If the business combination had taken place at the beginning of the 2020 financial year, net revenue and consolidated profit before non-controlling interests would have been respectively EUR 119 million and EUR 9 million higher than reported. These effects are based on the assumption that the fair value adjustments, determined provisionally, that arose on the date of acquisition would have been the same, if the acquisition had occurred on January 1, 2020.

The composition of the Deutsche Telekom Group changed as follows in the 2020 financial year:

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

Agreed sale of Telekom Romania Communications

On November 5, 2020, OTE concluded an agreement with Orange Romania concerning the sale of the 54 % stake in Telekom Romania Communications S.A., which operates the Romanian fixed-network business, to Orange Romania for a purchase price of EUR 268 million. The transaction is subject to approval by the authorities as well as other closing conditions.

Merger of the cell tower business in the Netherlands and set-up of an infrastructure fund

Deutsche Telekom intends to set up a fund for investments in digital infrastructure in Europe. On January 21, 2021, Deutsche Telekom, Cellnex Telecom S.A. (Cellnex), the newly established independently managed investment company Digital Infrastructure Vehicle I SCSp (DIV), and others signed an agreement to merge Deutsche Telekom’s and Cellnex’s respective Dutch subsidiaries for passive mobile infrastructure, T‑Mobile Infra B.V. and Cellnex Netherlands B.V., (Cellnex NL) into Cellnex NL. In the first step, T‑Mobile Infra B.V. is to be sold to DIV. Deutsche Telekom undertakes to invest up to EUR 400 million in DIV. Cellnex undertakes to invest up to EUR 200 million in DIV. Deutsche Telekom will receive a dividend from T‑Mobile Infra B.V. of EUR 250 million and a purchase price from DIV that is more or less equivalent to Deutsche Telekom’s investment commitment to DIV. In the second step, DIV is to contribute its stake in T‑Mobile Infra into Cellnex NL. In return, DIV will receive a stake of around 38 % in the “new” company Cellnex NL. As a result, Deutsche Telekom will lose control over T‑Mobile Infra B.V. and will initially include it in the consolidated financial statements indirectly through DIV and then as an investment accounted for using the equity method. T‑Mobile Netherlands will continue in future to have full access to the transferred infrastructure by means of a long-term service agreement, primarily by leasing infrastructure components at normal market terms and conditions. The transaction is expected to be closed in the first half of 2021, following approval by the responsible antitrust authority. In future, further institutional investors in addition to Deutsche Telekom and Cellnex will be given the opportunity to buy a stake in DIV. Deutsche Telekom plans to maintain around 25 % of the fund in its target structure. Until this target structure is achieved, DIV is expected to be included in Deutsche Telekom’s consolidated financial statements as a subsidiary. The assets and liabilities of T‑Mobile Infra B.V. are reported in Deutsche Telekom’s consolidated financial statements as of December 31, 2020 as non-current assets and disposal groups held for sale and liabilities directly associated with non-current assets and disposal groups held for sale.

For further information, please refer to Note 5 “Non-current assets and disposal groups held for sale and liabilities directly associated with non-current assets and disposal groups held for sale.”