Troubles So Far Don't Delay Telekom's Plan to Sell Stock

The $66 billion German telephone company is likely to be the biggest privatization in European history

THE combination of the resignation of Deutsche Telekom's chairman, a couple of regulatory hassles, and a phone sex scandal among some employees might well be expected to dampen investor interest in a public offering of the national telephone company's stock.

But not so far. Given the possibilities of the information superhighway and the status of Telekom as the world's third-largest phone company, plenty of people still want a piece of the German carrier's action.

``The current news should be well put to bed by the time it [Telekom] comes to market,'' says Patrick Earle, a telecommunications analyst with investment house J. P. Morgan & Co. Inc. in London.

``There's still a lot of water that will go under the bridge,'' Mr. Earle continues. ``But it clearly has potential.''

Deutsche Telekom - estimated to be worth about $66 billion - is likely to be the biggest privatization in European history. The first step came Jan. 1, when Germany's Post Ministry formally transformed Telekom, along with the postal service and postal bank, into joint-stock companies.

The phone company's first share offering is expected in 1996. The German government plans to retain a majority stake in Telekom at least until 1998.

Two German financial institutions, Deutsche Bank and Dresdner Bank, will anchor the consortium handling the share offering. The third major participant is international banking firm Goldman, Sachs & Co. in New York, which will be chief coordinator for selling Telekom stock to investors abroad.

Telekom officials envision that up to 60 percent of the initial offering will go to German investors; about 20 percent should be allotted for sale in the United States; 10 percent in Britain; and the remainder elsewhere.

The future may appear lucrative, but the present has seen Telekom hit by a series of negative news reports, some more embarrassing than substantial. In early December, for instance, investigators uncovered a scam that bilked the telephone company out of millions of dollars. Employees ran up huge phone bills to Caribbean-based phone-sex operators.

The Post Ministry was required by law to pick up the tab for the fraudulent calls, while the employees received kickbacks from the phone-sex operators. Two Telekom workers have been arrested in connection with the operation.

In a development with more serious implications, Telekom Chairman Helmut Ricke resigned unexpectedly in mid-December. Mr. Ricke didn't provide a clear reason for his decision. The company is being run by a caretaker administration until a permanent replacement is found.

In recent months, Telekom's growth strategy has also gotten tangled in regulatory red tape.

In the worst setback, the European Commission, the executive body of the 15-member European Union, rejected a bid by Telekom to join German media giants Bertelsmann A.G. and the Kirche Group to form a multimedia, pay-TV service in Germany, Europe's largest market. The commission said the proposal would be anticompetitive.

In addition, Telekom's planned purchase, along with French Telecom, of a 20 percent share of US carrier Sprint Corporation for $4.2 billion faces an uncertain future. That's because the Republican-controlled US Senate must approve the deal, and legislators appear reluctant to do so unless the foreign companies take steps to open up their domestic markets to American competition.

Telekom's near monopoly of its domestic market is currently its biggest asset, helping it bolster its profit margins. The company also positioned itself well for the future by moving aggressively into the underdeveloped markets of Central and Eastern Europe. It has purchased substantial stakes in Hungary's and Ukraine's phone companies and is participating in an international effort to upgrade Russia's phone network. The latter deal potentially is worth $40 billion.

Experts add, however, that if Telekom is to be globally competitive in the 21st century, it will have to boost productivity and improve service.

With 230,000 employees, Telekom's work force is bloated and bureaucratized, and it would have trouble today withstanding competition if it weren't for its protected market. Company officials want to cut at least 30,000 jobs over the next five years and instill more of a customer-oriented corporate culture.

The changes will inevitably produce growing pains, but they shouldn't be enough to seriously damage Telekom's prospects.

``There are other companies that have gone through similar painful transitions,'' Earle says. ``That's something that investors are used to.''

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