Deutsche Telekom sweetens float with dividend promise

Deutsche Telekom, Germany's state-owned telephone company, yesterday posted increased first-half profits and promised record dividends as it prepared for partial privatisation in November.

The company's first interim results showed a rise in operating profit of 22 per cent, despite the introduction at the beginning of this year of sales tax, and cuts in prices that still leave German telephone charges among the highest in the world.

Most of the earnings were used to fatten up the company's reserves in an effort to make the shares more attractive for the November flotation. Of the DM2.7bn (pounds 1.2bn) first-half operating profit, some DM1.85bn has been sunk into reserves set aside for restructuring. Group net profit was DM500m.

"We have used the first half of the year to get in shape for our listing," said Ron Sommer, Deutsche Telekom's chairman. "The positive development will accelerate in the second half of the year."

Getting in shape primarily means sacking a large number of workers. From a peak of 230,000 employees, the company has already cut 23,000 - most of them laid off this year. By 2000, the expiry date of the restucturing programme, the total work-force should not exceed 170,000.

The redundancies have the unions' agreement, and will be financed in part from current reserves and the profits of the next two years.

"Our new shareholders will be free of the burdens of the past," said Joachim Kroske, the chief finance officer.

Other historical burdens will be harder to tackle, however. The company has cut its debts from DM125bn to a "mere" DM100bn, and wants to reduce them by another DM40bn by2000.

The debts are the biggest worry to prospective shareholders looking for evidence of long-term profitability. Another concern is Deutsche Telekom's ability to survive in the dawning competition. Would-be operators, headed by a consortium including Mannesmann and AT&T, are already jostling for a slice of the lucrative German market.

Prices are certain to come down when the monopoly is abolished, and Deutsche Telekom's revenues are bound to suffer.

In an attempt to soothe investors' fears and facilitate Germany's largest privatisation, Deutsche Telekom has taken the unusual step of promising to pay out DM1.5bn in dividends at the end of the year.

That should make the listing a success, but the question of whether the behemoth of European telecommunications is becoming more agile remains unanswered.