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Drillisch slumps after profit warning on Telefonica Deutschland spat


By Douglas Busvine

BERLIN (Reuters) - Shares in 1&1 Drillisch and its parent United Internet slumped on Monday after the German telco warned that an increase in the cost of its network access deal with Telefonica Deutschland 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 to come in at 600 million euros ($712 million) this year - down from 683.5 million last year.

Drillisch shares fell 27.8%.

Analysts asked CFO Markus Huhn why Drillisch had not seen the price hike coming earlier.

Huhn said Drillisch had based its earlier outlook on expectations that Telefonica Deutschland's price would come down gradually. Instead, the price 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 pricing showdown for network access raises the stakes in talks with Telefonica on a national roaming deal that would allow 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".

Drillisch, which has so far not held talks with Germany's other network operators, Deutsche Telekom and Vodafone, has called on Germany's telecoms regulator to urge them to join negotiations on a roaming deal, it said in a statement on Monday.

Terms of the 5G frequency auction stipulate that the regulator acts as an arbitrator to ensure fair conditions for newcomers in the market.

Drillisch reserves the right to file a similar request with regard to Telefonica, the company 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 mitigation, national roaming negotiations reportedly remain constructive, so Telefonica's move is possibly tactical."

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

(Editing by Edward Taylor/Kirsten Donovan/Jane Merriman)

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