Changes in the composition of the Group, transactions with owners, and other transactions

In the first nine months of 2018, Deutsche Telekom conducted the following transactions, which (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 interim 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, and its plans include rolling out its own TV service in 2018. 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 transaction 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. Since the acquisition date of July 31, 2018, UPC Austria has been included in the consolidated financial statements as a fully consolidated subsidiary. 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 the leading broadband provider in the Austrian market. The combination of the fast UPC fiber-optic network and T-Mobile Austria’s high-performance LTE network will put the company in a good position to take a leading role in terms of internet speed, service, and entertainment in Austria.

As the transaction was concluded so close to September 30, 2018, all information relating to it that is provided here is provisional. The purchase price allocation and the measurement of the UPC Austria group’s assets and liabilities as of July 31, 2018 had not yet been finalized by September 30, 2018. This applies, in particular, to the measurement of the company’s property, plant and equipment, and intangible assets, as well as the accounting of non-controlling interests. Therefore, the net carrying amount of the goodwill may also change.

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 provisional adjustments to net working capital and net debt in accordance with the purchase agreement. The aforementioned consideration may be adjusted on the basis of the closing statements – to be submitted to the seller by the buyer within 60 business days – detailing the final figures for net working capital and net debt.

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

The preliminary acquired goodwill of EUR 536 million to be recognized in Deutsche Telekom’s consolidated statement of financial position is calculated as follows:

In the course of the business combination, the non-controlling interests were recognized at the fair value of the prorated net assets excluding goodwill. On the basis of the carrying amount of the shareholders’ equity, the PPA adjustments directly attributable to UPC Telekabel Wien GmbH were taken into account and, subsequently, the corresponding share of the non-controlling interests was calculated. 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.

Goodwill resulting from the business combination is not recognized under local tax law 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. As the call option for the non-controlling interests purchased in the course of the business combination is an equity instrument, it was offset against consolidated shareholder’s equity at the acquisition date.

A detailed analysis of the receivables acquired has not yet been completed. 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.

No material transaction-based costs were incurred by September 30, 2018.

Deutsche Telekom’s net revenue increased by EUR 61 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 271 million higher. Deutsche Telekom’s net profit for the current reporting period includes profit of EUR 16 million from the UPC Austria group. If the business combination had already taken place on January 1, 2018, the Group’s net profit would have been EUR 86 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 end 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 period.

As it had announced in advance, the Federal Republic of Germany exercised its option 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 guaranteed equity base of at least EUR 50 million for Toll Collect GmbH.

The following transaction is expected to change the composition of the Deutsche Telekom Group in future.

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 will hold the majority of the seats on the new company’s 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.