Group organization, strategy, and management

With regard to our Group organization, strategy, and management, please refer to the explanations in the 2018 Annual Report. The following changes and/or additions were recorded from the Group’s point of view:

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 Holding N.V. by T‑Mobile Netherlands Holding B.V. Tele2 Group received a consideration in the form of a 25 percent stake in T‑Mobile Netherlands, along with a provisional cash payment (taking purchase price adjustments into account) of EUR 234 million. 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 the acquisition date. This transaction will establish a stronger, more sustainable provider of convergent fixed-network and mobile services on the Dutch market.

On January 15, 2019, OTE concluded an agreement concerning the sale of its stake in Telekom Albania to the Bulgarian company Albania Telecom Invest AD for a purchase price of EUR 50 million. The transaction was approved by the authorities and then consummated on May 7, 2019.

The consummation of our Business Combination Agreement to merge with Sprint is subject to approvals by the regulatory and anti-trust authorities and certain other customary closing conditions. On June 18, 2018, we filed the Public Interest Statement and applications for approval of our merger with Sprint with the Federal Communications Commission (FCC). The FCC granted formal approval on October 16, 2019. In June 2019, the attorneys general of 13 states and the District of Columbia filed a lawsuit against T‑Mobile US, Deutsche Telekom, Sprint, and Softbank Group Corp. in the U.S. District Court for the Southern District of New York. Another four U.S. states have since joined the suit, while the attorneys general of Mississippi and Colorado withdrew from the lawsuit following settlement agreements. We believe the lawsuit is without merit. On July 26, 2019, we entered into a consent decree with the U.S. Department of Justice, which is now awaiting confirmation by the U.S. federal court in Washington. As such, the DoJ is waiving its right under U.S. law to file a suit against the transaction. In parallel, multiple agreements were signed with the U.S. TV satellite operator DISH Networks to implement the conditions for the merger. Once the legal proceedings are concluded, we expect to close the transaction in early 2020.

Business-to-business telecommunications services are to be realigned in 2020. Consistent with our efforts to implement the Group’s strategy pillar “Lead in business productivity,” the plan is to set up a new B2B telecommunications services unit within the Germany operating segment. The new unit will consist of the TC Services and Classified ICT portfolio units currently assigned to the Systems Solutions operating segment. The goal is to improve efficiency for our business customers and simplify our operational business. In parallel, the portfolio units Security and IoT (Internet of Things) will be spun off into independent legal entities (limited liability companies under German law (GmbHs)) to strengthen Deutsche Telekom’s position in both areas. Independent entities benefit from simpler decision-making processes and are able to act in a more agile way to better respond to market trends.

Effective January 1, 2019, we created the new Board of Management department “USA and Group Development.” Deutsche Telekom AG thus has had nine Board departments since the start of 2019. Thorsten Langheim took up the role of head of the newly created Board department. The former Board member responsible for Human Resources (CHRO), Dr. Christian P. Illek, became the new CFO as of January 1, 2019. Birgit Bohle joined the Board of Management on January 1, 2019 as the Board member responsible for Human Resources as successor to Dr. Illek.

At its meeting on May 22, 2019, the Supervisory Board of Deutsche Telekom AG resolved to dissolve the “Data Privacy, Legal Affairs and Compliance” Board department (DRC) effective December 31, 2019. After this date, Internal Audit and Risk Management will be assigned to the “Finance” Board department. Group Security Governance will be assigned to the “Technology and Innovation” Board department. As Executive Vice President, General Counsel Dr. Claudia Junker will lead the Data Privacy, Legal Affairs, and Compliance units, reporting directly to Birgit Bohle. Birgit Bohle will head up the extended “Human Resources and Legal Affairs” Board department from January 1, 2020. Dr. Thomas Kremer will leave the Group for reasons of age effective March 31, 2020. Until his departure, Dr. Kremer will support the transition to the new structures as part of a designated mandate.

The mandatory first-time application of the new IFRS 16 “Leases” accounting standard as of January 1, 2019 has a material impact on Deutsche Telekom’s consolidated financial statements. The new standard requires payment obligations from existing operating leases to be discounted and recognized as lease liabilities; as financial liabilities, they increase net debt. At the same time, the lessee recognizes a right-of-use asset. Operating expenses previously recognized in connection with operating leases will in future be recognized in depreciation charges on right-of-use assets and in interest expenses for discounted obligations from operating leases, as appropriate. This will significantly increase EBITDA without any attendant change in the economic circumstances. In the statement of cash flows, the principal repayment portion of the lease payments from existing operating leases will reduce net cash from/used in financing activities and no longer affect net cash from operating activities. The interest portion of the payments will remain in net cash from operating activities and thus also in free cash flow.

Since expenses and cash outflows for leases are substantial elements of our earnings performance and solvency, effective the start of the 2019 financial year we have taken into account the effects of the mandatory first-time application of the IFRS 16 accounting standard when determining our financial performance indicators. We also want to ensure maximum comparability with our previous performance indicators. Our operational performance is now measured on the basis of “EBITDA after leases” (EBITDA AL) (previously EBITDA). EBITDA AL is calculated by adjusting EBITDA for depreciation of the right-of-use assets and for interest expenses on recognized lease liabilities. The “free cash flow” performance indicator has been replaced by “free cash flow after leases” (free cash flow AL). Free cash flow AL is determined by adjusting free cash flow for repayments of lease liabilities. To improve comparability of our performance indicators with the EBITDA and free cash flow indicators reported in the financial statements of T‑Mobile US in accordance with U.S. GAAP, which continues to differentiate between operating and finance leases, expenses and repayments for finance leases at T‑Mobile US will not be taken into account when determining EBITDA AL and free cash flow AL. For more information on the new IFRS 16 accounting standard, please refer to the section “Accounting policies” in the interim consolidated financial statements.

A reconciliation of the definitions of the former financial performance indicators with the new “after leases” indicators can be found in the following table.

The published prior-year figures have not been adjusted retroactively following the first-time application of IFRS 16. To enable comparability with the new performance indicators, pro forma comparatives were determined for the prior year. These were reached using approximate calculations of the key effects of IFRS 16 for the prior year, before applying the calculation shown in the table for the current year. Changes to the organizational structure within the Group were also taken into consideration.