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Drillisch slumps after profit warning on Telefonica Deutschland spat

Credit: REUTERS/© Fabrizio Bensch / Reuters

Shares in German telecom 1&1 Drillisch and its parent United Internet slumped on Monday after it warned that an increase in the cost of its network access deal with Telefonica Deutschland would hit profits this year.

By Douglas Busvine

BERLIN, Sept 21 (Reuters) - Shares in German telecom 1&1 Drillisch DRIG.DE and its parent United Internet UTDI.DE slumped on Monday after it warned that an increase in the cost of its network access deal with Telefonica Deutschland O2Dn.DE would hit profits this year.

The virtual mobile network operator said Telefonica Deutschland would increase prices from July 1 under a five-year extension to a deal that resulted from merger remedies on Telefonica dating back to 2014.

As a result, Drillisch now expects earnings before interest, taxation, depreciation and amortisation (EBITDA) to come in at 600 million euros ($712 million) this year - down from 683.5 million last year.

Shares extended losses to 27% after CFO Markus Huhn fielded tough questions on a conference call with analysts, who asked why Drillisch had not seen the price hike coming earlier.

Huhn said Drillisch had based its earlier outlook on expectations that the price Telefonica Deutschland charges for data would come down gradually. Instead, the price it was billed for July and August was higher - based on a 12-month average for the previous year.

Shares in parent United Internet slid by 23%. Tycoon Ralph Dommermuth owns 42.5% of United Internet and is CEO of both companies.

SHOWDOWN

The showdown on pricing for network access raises the stakes in ongoing talks with Telefonica on a national roaming deal that would make it possible for Drillisch to plug gaps in the 5G network it plans to build after acquiring spectrum last year.

Huhn described the roaming talks with Telefonica as "constructive", adding that Drillisch was not considering opening talks with Germany's other network operators, Deutsche Telekom DTEGn.DE and Vodafone VOD.L.

Drillisch was continuing preparations for its 5G network and in discussions with vendors on buying network equipment, Huhn added.

Telefonica Deutschland said it had submitted an invoice for network access services in July and August on the basis of the extension agreed in December. It added that the terms it was offering for national roaming were attractive.

"Drillisch's business model is exposed to unquantifiable risk in the legal battle over the Telefonica-Drillisch contract, and this development is a case in point," Jefferies analyst Ulrich Rathe said in a note.

"In mitigation, national roaming negotiations reportedly remain constructive, so Telefonica's move is possibly tactical."

Analysts at Citi said the latest turn in the dispute showed that Telefonica Deutschland had a strong negotiating hand in the national roaming talks, while Drillisch faced uncertainties in its strategy of becoming a network operator.

($1 = 0.8432 euros)

(Editing by Edward Taylor and Kirsten Donovan)

((douglas.busvine@tr.com; +49 30 220 133 562;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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