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Deutsche Telekom Eyes Acquisitions as Profit Drops 43%

Deutsche Telekom said on Thursday it was seeking acquisitions to fuel growth as Europe's largest telecoms operator blamed fierce competition and staff costs for a 43% drop in annual net profit.

Hoisting an effective "for sale" sign over non-core assets such as Internet companies in France, Spain and radio towers in Germany and the United States, the group's new chief executive vowed to cut costs and revive the flagship German company.

"Our focus for growth will be abroad," said Rene Obermann, who faces analysts and investors later on Thursday for the first time as CEO since taking the helm in November. "We want to examine mobile phone acquisitions abroad."

Deutsche Telekom has been tipped as a possible acquirer of a stake in Greek peer OTE, which owns growing eastern-European assets, and of France Telecom's Orange Netherlands unit. But Obermann declined to be drawn on details.

He told a news conference only: "The most perfect possibilities to grow in foreign markets will do us no good if we fail to get a grip on our efficiency and costs at home."

Deutsche Telekom's shares, which have been on a downward trend since January, slid 2.5% to 13.22 euros, underperforming a flat broader telecoms market.

Despite shocking the market in late January with its second profit warning in six months, net profit of 3.17 billion euros ($4.2 billion) missed average analyst forecasts of 4.24 billion euros. Revenues came in at 61.3 billion euros,as expected.

But the company also disappointed some investors by leaving its dividend unchanged at 0.72 euros per share. "There were some hopes for a positive surprise regarding the dividend, but they were not fulfilled," HVB analyst Thomas Friedrich said.

COST CUTS

Europe's largest phone operator by sales wants to save 2.0 billion euros this year and 4.2-4.7 billion euros by 2010 from 2005 levels. As part of the drive, Deutsche Telekom plans to move up to 50,000 employees into lower-paying subsidiaries. Thousands of staff have taken to the streets in protest.

It also wants to beef up domestic customers, who have been leaving in droves for smaller, cheaper rivals, by more than 40% this year. Deutsche Telekom plans to follow some of its domestic peers and launch a no-frills brand in Germany, Europe's largest telecoms market, to claw back lower-spending customers. Obermann said the new brand should generate 1.0 billion euros by 2010.

Some analysts warned that there was still no evidence that the fall in prices in the German market had slowed or that Deutsche Telekom's new management team could negotiate the prickly politics of trying to cut the company's swollen cost base.

Of the 250,000 staff Deutsche Telekom employs worldwide, 180,000 are based in Germany and 45,000 are effectively civil servants. However, some investors are willing to bide their time while Obermann, who at 43 is the youngest chief executive in Germany's blue-chip DAX index, finds his feet at a company that has already ousted two of his predecessors.

"We are waiting for an investor day," said Heinrich Ey, a fund manager at Deutscher Investment Trust DIT. "They will probably try to sell some non-core assets abroad, like the broadband business in Spain and France. That should be possible. We see that slightly positive. But it would not be enough for any real advancement."

Earnings before interest, tax, depreciation and amortisation (EBITDA), adjusted for special items, fell 6.2 to 19.4 billion euros, in line with company forecasts.

Deutsche Telekom also cut forecasts for adjusted EBITDA for this year to 19.0 billion euros from a previous forecast of between 19.7 billion euros and 20.2 billion and forecast only moderate sales growth.

While domestic sales dropped by 5% to 32.5 billion euros compared with a year earlier, international sales grew 13.6% to 28.9 billion, the company said.

The former state monopoly is struggling to stem a loss of customers in its fixed-line business in Germany, which is under attack from a slew of resellers offering discounted broadband packages.