Changes in the composition of the Group and other transactions

In the first quarter of 2021, Deutsche Telekom did not conduct any material new transactions that had an impact on the composition of the Group. The following developments were recorded in connection with transactions conducted in the Group in prior periods. Other changes to the composition of the Group not shown here were of no material significance for Deutsche Telekom’s interim consolidated financial statements.

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. Previously, on April 16, 2020, the business combination had been approved by the California Public Utilities Commission (CPUC). 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 from/used in 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 eight 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 seven 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.

The following transactions will change the composition of the Deutsche Telekom Group in future.

Merger of the cell tower business in the Netherlands and set-up of an infrastructure fund

Deutsche Telekom intends to 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 I SCSp (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, T‑Mobile Infra B.V. is to be sold to DIV. Deutsche Telekom undertakes to invest up to EUR 400 million in DIV. Cellnex undertakes to invest up to EUR 200 million in DIV. Deutsche Telekom will receive a dividend from T‑Mobile Infra B.V. of EUR 250 million and a purchase price from DIV that is more or less equivalent to Deutsche Telekom’s investment commitment to DIV. In the second step, DIV is to contribute its stake in T‑Mobile Infra into Cellnex NL. In return, DIV will receive a stake of around 38 % in the “new” company Cellnex NL. As a result, Deutsche Telekom will lose control over T‑Mobile Infra B.V. and will account for it in the consolidated financial statements using the equity method, initially indirectly through DIV. T‑Mobile Netherlands will continue in future to have full access to the transferred infrastructure by means of a long-term service agreement, primarily by leasing infrastructure components at normal market terms and conditions. The transaction is expected to be closed in the second quarter of 2021, following approval by the responsible antitrust authority. 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 this target structure is achieved, DIV is expected to be included in Deutsche Telekom’s consolidated financial statements as a subsidiary. The assets and liabilities of T‑Mobile Infra B.V. are reported in Deutsche Telekom’s consolidated financial statements as of March 31, 2021 as non-current assets and disposal groups held for sale and liabilities directly associated with non-current assets and disposal groups held for sale.

For further information, please refer to the notes on “Non-current assets and disposal groups held for sale” and “Liabilities directly associated with non-current assets and disposal groups held for sale.”

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. The acquisition meets the conditions for a business combination in accordance with IFRS 3. The purchase price for the Shentel wireless telecommunications assets to be purchased by Sprint is determined through the valuation process prescribed in the agreement. On February 1, 2021, the valuation process was completed. The parties are negotiating the remaining outstanding terms of a definitive agreement to govern the purchase of Shentel’s wireless telecommunication assets and expect the transaction to close in the third quarter of 2021 after satisfying customary conditions to closing. The base purchase price of the wireless telecommunication assets 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.