Tax Cut Funding May Hit Telekom, Post Shares

German shareholders of Deutsche Telekom and Deutsche Post face having the value of their stock slashed if Hans Eichel, the federal finance minister, has his way in the sweeping tax reforms recently agreed upon in the German parliament.

The mediation committee made up of ruling coalition and opposition members of Germany's two legislative chambers, the Bundesrat and the Bundestag, came to an agreement earlier this week that a total of €3.3 billion could be generated for the financing of tax relief measures.

Stock market observers believe the funding wíll come from the sale of a percentage of state-owned Telekom and Post stocks and the privatization of federal interests in the Frankfurt, Cologne/Bonn and Munich airports and the harbor at Duisburg. Such sales would contribute towards the financing of the German government’s proposed €7.8 billion package of tax cuts planned for next year.

State-owned shares destined for market?

As part of its plan, the government could put Telekom stocks worth a total of €2.3 billion up for sale, in addition to the €5.5 billion which were “parked” with the state-owned development bank KfW in November.

When these shares eventually make it to market, the effects of such a huge sale on the value of Telekom and Post shares will be one of widespread dilution. With so many shares available for sale, the supply and demand ratio would lower the price of all stock, which would spell bad news for company shareholders.

Effects already being felt

"The threat that stocks are going to be put on the market always affects them in a negative way," said Henning Gebhardt, at the Frankfurt investment fund society DWS, in an interview with the Berliner Zeitung newspaper. Marcus Sander, a telecommunications expert with investment bank Sal Oppenheim, added in the same article that news of the expected stock sales had already put "a brake on Telekom shares."

The government’s stake in Deutsche Telekom, owned through KfW, is worth about €25 billion at the current market price while its stake in Deutsche Post is worth around €11 billion.

Parking would generate instant cash

Government sources quoted in the Berliner Zeitung suggested that the sale of the shares would be done carefully and at the right time, presumably when the market climate was more favorable. The stocks would more than likely be sold to the KfW bank first rather than directly onto the market, generating cash flow for the government immediately, and then held in trust until the time was right for them to be sold openly.

Any sales from the airport and harbor privatization action would be placed directly on the market and not parked at the KfW, a government source told the financial news wire Dow Jones.

More privatization to come

It was a widely known fact within governmental circles that Eichel had already planned to introduce the privatization measures and the generation of funds through the sale of Telekom and Post stocks in the federal budget before the arrangement was agreed in the mediation committee. He has since stated that he wants to make further cuts in state participation in the most valuable sectors in 2004, which could raise an extra €7 billion and bring the funding to around €10.3 billion.