Changes in the composition of the Group and other transactions

In the first nine months of 2021, the following developments were recorded in the Group in connection with transactions conducted by Deutsche Telekom in prior periods.

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. The last approval was granted by the California Public Utilities Commission (CPUC) on April 16, 2020. As a consequence of the business combination, T‑Mobile US took over all shares in Sprint.

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 the 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 purchase price allocation and the measurement of Sprint’s assets and liabilities at the acquisition date were finalized as of March 31, 2021.

The 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 used in/from 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 fair values of Sprint’s acquired assets and liabilities recognized at the acquisition date 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 an 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 8 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 7 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 2,924 million. The gross amount of trade receivables totals EUR 3,076 million, of which EUR 152 million is expected to be bad debt.

In the first quarter of 2021, measurement adjustments were made to the acquired assets and liabilities, which mainly related to taxes, contingent liabilities, and spectrum leases and resulted in an immaterial change in goodwill.

The acquired goodwill of EUR 8,704 million is calculated 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 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 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 goodwill 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.

For further information on the business combination of T‑Mobile US and Sprint, please refer to the section “Group organization” in the combined management report and the section “Summary of accounting policies – Changes in the composition of the Group and other transactions” in the notes to the consolidated financial statements in the 2020 Annual Report.

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 % stake in the Dutch MVNO and SIM provider Simpel.nl B.V. 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 purchase price allocation and the measurement of Simpel’s assets and liabilities at the acquisition date were finalized as of June 30, 2021. The finalization of the purchase price allocation did not result in any material changes to the fair values of the assets acquired and the liabilities assumed at the acquisition date compared with those reported in the notes to the consolidated financial statements as of December 31, 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 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. 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:

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.

For further information on the acquisition of Simpel, please refer to the section “Summary of accounting policies – Changes in the composition of the Group and other transactions” in the notes to the consolidated financial statements in the 2020 Annual Report.

In the first nine months of 2021, Deutsche Telekom conducted the following transactions, which had 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.

Combination of the cell tower business in the Netherlands and creation of an infrastructure fund

Deutsche Telekom has 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 II SICAF-RAIF (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, Deutsche Telekom and Cellnex carried out an increase in capital at DIV. As a result, Deutsche Telekom holds 66.67 % and Cellnex 33.33 % of the shares in DIV. Since Deutsche Telekom has control over DIV, DIV is included in the consolidated financial statements of Deutsche Telekom as a subsidiary. T‑Mobile Infra B.V. was then sold to DIV. Immediately before the sale, Deutsche Telekom received a dividend of EUR 0.3 billion from T‑Mobile Infra B.V. In the next step, DIV contributed its stake in T‑Mobile Infra B.V. into Cellnex NL. In return, DIV received a stake of 37.65 % in the “new” company Cellnex NL. The transaction was consummated on June 1, 2021, after the responsible antitrust authority had granted all the necessary approvals. As a consequence, Deutsche Telekom lost control over T‑Mobile Infra B.V. and EUR 0.2 billion of the resulting gain on deconsolidation of EUR 0.3 billion was included in other operating income as of September 30, 2021. EUR 0.1 billion will be recognized pro rata in later periods through the sale-and-leaseback transaction described below. Since June 1, 2021, the stake in Cellnex NL has been indirectly included in the consolidated financial statements through the investment in DIV as an investment accounted for using the equity method with a carrying amount of EUR 0.4 billion. The carrying amount of the non-controlling interest of 33.33 % in DIV amounted to EUR 0.1 billion as of June 1, 2021. Since the shares in DIV are puttable, the non-controlling interests were recognized under non-current financial liabilities.

T‑Mobile Netherlands will continue to have full access to the contributed passive mobile infrastructure by means of a long-term agreement at normal market conditions, primarily on the lease of the corresponding infrastructure. The lease component included in the agreement with a non-cancelable basic lease term of around 12 years fulfills the conditions of a sale-and-leaseback transaction. Right-of-use assets in the amount of EUR 0.3 billion and lease liabilities in the amount of EUR 0.4 billion were recognized in this context as of June 1, 2021. The gain from the sale-and-leaseback transaction totaled EUR 0.1 billion, EUR 12 million of which was recognized directly in profit or loss; the remainder will be released to profit or loss over the residual useful lives of the rights-of-use assets. The cash inflow totaling EUR 377 million resulting from the sale of T‑Mobile Infra B.V. is recognized in the consolidated statement of cash flows as of September 30, 2021, with EUR 135 million relating to the sale of the business operation recognized under net cash used in investing activities and EUR 242 million relating to the sale and leaseback of the passive mobile infrastructure recognized under net cash used in/from financing activities.

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 control is lost, DIV will be included in Deutsche Telekom’s consolidated financial statements as a subsidiary.

Acquisition of Shentel

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. On May 28, 2021, a purchase agreement was signed between T‑Mobile US and Shentel for the acquisition of assets and liabilities directly associated with the aforementioned wireless telecommunications operation of Shentel. The base purchase price is USD 1.9 billion, subject to certain purchase price adjustments prescribed by the agreement as well as additional purchase price adjustments agreed by the parties. The transaction was consummated on July 1, 2021 after obtaining the necessary approvals from the regulatory authorities and satisfying the other closing conditions.

The preliminary consideration transferred as of the acquisition date in the form of a cash payment – taking into account the settlement paid for the pre-existing relationships between T‑Mobile US and Shentel for a total of USD 0.1 billion (EUR 0.1 billion) – amounted to USD 1.9 billion (EUR 1.6 billion).

The acquisition meets the conditions for a business combination in accordance with IFRS 3. The purchase price allocation and the measurement of Shentel’s assets and liabilities at the acquisition date had not been finalized as of September 30, 2021. The preliminary fair values of Shentel’s acquired assets and liabilities are presented in the following table:

The preliminary goodwill of EUR 872 million is calculated as follows:

The preliminary goodwill comprises the cost savings anticipated in connection with the acquisition, in particular from the integration of the network infrastructure and the telecommunications systems. No part of the recognized goodwill is expected to be deductible for income tax purposes.

Other intangible assets primarily include reacquired rights for the provision of telecommunications services in Shentel’s former area of business activities. The reacquired rights are attributable to the fact that the management and service agreement with Shentel, due to expire in 2029, was terminated prematurely in connection with the business combination. As a result, T‑Mobile US recovered the rights of distribution and operation transferred to Shentel for this period of time and thus the cash flows from the customer contracts. The reacquired rights were measured using the multi-period excess earnings method. These rights are amortized over their remaining useful life of around 9 years.

No material contingent liabilities have been identified.

Transaction-related costs totaling EUR 10 million were incurred in the Group in the reporting period. These mainly comprised legal and consulting fees and are included under other operating expenses.

Deutsche Telekom’s net revenue increased by EUR 124 million in the reporting period due to the acquisition. Net profit for the reporting period includes Shentel’s total profit before non-controlling interests of EUR 7 million. If the business combination had taken place at the beginning of the 2021 financial year, net revenue and net profit before non-controlling interests would have been respectively EUR 202 million and EUR 24 million higher than reported.

Sale of Telekom Romania Communications

On November 6, 2020, OTE concluded an agreement with Orange Romania concerning the sale of the 54 % stake in Telekom Romania Communications S.A. (TKR), which operates the Romanian fixed-network business, to Orange Romania. The transaction was consummated on September 30, 2021 after obtaining the necessary approvals from the authorities and satisfying the other closing conditions. The purchase price is EUR 296 million. The loss on deconsolidation resulting from the sale amounts to EUR 29 million. TKR’s 30 % stake in Telekom Romania Mobile Communications (TKRM) had previously been acquired by OTE on September 9, 2021 as agreed for a purchase price of EUR 59 million.

The following transaction will change the composition of the Deutsche Telekom Group in the future:

Agreed sale of T‑Mobile Netherlands

On September 6, 2021, Deutsche Telekom and Tele2 agreed to sell T‑Mobile Netherlands to WP/AP Telecom Holdings IV, a private equity consortium advised by Apax Partners and Warburg Pincus. The preliminary sale price is based on an enterprise value of EUR 5.1 billion. The cash inflow – based on a shareholding of 75 % – is expected to be around EUR 3.8 billion. The transaction is subject to approval by the authorities as well as other closing conditions. The assets and liabilities of T‑Mobile Netherlands as of September 30, 2021 are reported in the consolidated statement of financial position as “held for sale.” The closing of the transaction is expected to be completed at the latest by the first quarter of 2022.