BERLIN (Reuters) - Shares in German telecom 1&1 Drillisch and its parent United Internet slumped on Monday after it warned that an increase in the cost of its network access deal with Telefonica (NYSE:TEF) Deutschland would hit profits this year.
Drillisch, a virtual mobile network operator, said it had been hit by Telefonica Deutschland with a price increase 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 said it now expected core earnings before interest, taxation, depreciation and amortization (EBITDA) to come in at 600 million euros ($712 million) this year - below last year's 683.5 million.
Shares in Drillisch crashed by 18% as analysts cautioned that the pricing dispute could escalate and hit Drillisch's plans to build a fourth mobile network in Germany. Its parent, United Internet, was down by 14%.
Drillisch, which bought spectrum for 5G services at auction last year, is seeking separately to negotiate terms for a national roaming deal with Telefonica to secure national coverage.
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 (NYSE:JEF) analyst Ulrich Rathe said in a note.
"In mitigation, national roaming negotiations reportedly remain constructive, so Telefonica's move is possibly tactical."
Analysts at Citi said the latest turn in the dispute showed that Telefonica Deutschland had a strong negotiating hand in talks on a national roaming deal, while Drillisch faced uncertainties in its strategy of becoming a network operator.