Blackstone’s DT Deal Draws Praise And Censure

Target: Deutsche Telekom stake

Sponsor: The Blackstone Group

Seller: Kreditanstalt fuer Wiederaufbau (KfW)

Purchase Price: $3.3 billion

Size of stake: 4.5%

Advisor: Sponsor: Deutsche Bank

The Blackstone Group’s recent $3.3 billion investment in Deutsche Telekom may have extended an olive branch to a hard-to-please German public, but the deal has also aroused some critics who view the transaction as a shift in the New York firm’s strategy.

Blackstone took over a 4.5% stake in Deutsche Telekom in late April, paying €14 a share for roughly 192 million shares in the company. The deal, which incorporates what one insider called a “traditional” amount of leverage, requires a two-year general lock-up period and reportedly gives the firm one seat on Deutsche Telekom’s approximately 20-person supervisory board.

In light of the beating the private equity industry has endured in Germany, the deal is a watershed transaction on a number of levels. Perhaps most notably, it signals that private equity’s standing in Germany might slowly be shifting. Blackstone was approached by the German government, and acquired a block in Deutsche Telekom that had previously been held by Kreditanstalt fuer Wiederaufbau (KfW), the state-backed banking group. This is the same government whose current Vice Chancellor Franz Muentefering branded PE groups as “locusts” just last spring.

The deal may also go a long way in helping the industry shed the slash-and-burn reputation in Germany. The lock-up period will preclude Blackstone from turning around and selling its holding for a quick profit, while its position on the supervisory committee puts the firm in an irenic role as a mentor, departing from the traditional authoritarian seat most groups seek.

This has struck a chord with German government. The country’s Finance Minister Peer Steinbrueck has been quoted by numerous press outlets as saying simply that he’s “happy” Blackstone is buying the DT stake.

However, not all industry onlookers are toasting the transaction. On the heels of a substantial fund drive (that is reportedly still ongoing), there are naysayers that view the Deutsche Telekom deal as an abrupt shift in the firm’s strategy.

One industry pro, a general partner at a mid-market firm, said, “They supposedly raised all this money because they didn’t want to club up on deals—they wanted to drive their own destiny. But here they are doing one of the world’s largest minority investments.”

That analysis echoes cries from earlier this decade regarding PIPE deals in which private equity groups would make substantial investments in public companies, and be relegated to a passive role on the board.

A source close to Blackstone, however, told Buyouts that the Deutsche Telekom investment will not be as passive as it may appear on the surface. “The German government brought [Blackstone] in specifically to get things done and make things happen,” the source said, adding that the firm wouldn’t make an investment “for the sake of just putting up money.”

The firm’s limited partners appear at this point to fully support the transaction. One LP that didn’t want to be named noted, “Passive is not defined by how much you own. It has to do with what rights and what role the GP is taking. It’s not always strictly a math issue… We expect an activist level of involvement [from Blackstone].”

As a result of the DT deal, Blackstone exited its investment in Kabel Baden-Württemberg GmbH & Co. (Kabel BW), a German cable provider, selling the business to Swedish private equity firm EQT in a reported €1.3 billion deal. The sale was precipitated by competition concerns.

It is anticipated that Lawrence Guffey, who is currently the chairman of Kabel BW, will assume the seat given to Blackstone on DT’s supervisory board. —K.M.