Telefonica Deutschland picks Nokia and Huawei for 5G network

TelefonicaDeutschlandpickedNokiaof Finland and China'sHuaweion Wednesday to build its5Gnetwork, seeking to get work moving even though Germany has yet to finalise security rules governing equipment suppliers.

The decision by the unit of Spain'sTelefonicacomes amid a heated debate in Germany over whether to heed USwarnings thatHuaweiposes such a serious security threat that it should be excluded from the criticalnetworkinfrastructure.

TelefonicaDeutschlandalso said it would cut its 2019 dividend by 37 per centto prioritisenetworkinvestments, following on the heels of similar cuts in the payout by competitors Deutsche Telekom and Vodafone.

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The company's shares were down 2.5per centat 0856 GMT in Frankfurt at their lowest level in a month and one of the top fallers on Europe's STOXX 600 index.

TelefonicaDeutschland, which operates under the O2 brand, is one of few European operators to have namedHuaweias a5Gvendor, following first-mover Sunrise of Switzerland, whoseHuawei-built5Gnetworkwent life earlier this year.

Berlin wants to toughen up technical certification and scrutiny of a vendor's governance, while lawmakers are still considering whether to introduce additional parliamentary oversight. Calls for an outrightHuaweiban have faded of late.

"We hope that this window of uncertainty will be as short as possible we don't yet have certification for any of our vendors,"TelefonicaDeutschlandCEO Markus Haas told reporters on a conference call.

Germany's other two mobile operators market leader Deutsche Telekom and Vodafone are existing customers ofHuaweibut have yet to publicly confirm whether they will stick with the Shenzhen-basednetworks leader for5G.

Haas hoped thatNokiaandHuaweiwould build theTelefonicaDeutschland5GRadio AccessNetworkon a 50-50 basis, but cautioned that this would be subject to receiving the necessary certification in Germany.

Work should start in early 2020, andTelefonicaDeutschlandsaid it expected to have5Gup and running in Berlin, Hamburg, Munich, Cologne, and Frankfurt by the end of 2021. A year later, 30 cities with a population of 16 million would be covered.

A decision on picking suppliers of its more sensitive 'core'networkwould be taken next year, Haas said.

The company, which is holding an investor briefing in London later, said it would cut its 2019 dividend to 0.17 euro ($0.19) from 0.27 euros.

This would become a new floor over the next three years, during which it expects cumulative revenue growth of at least 5 per cent, while the ratio of capital investment to sales will peak at 17-18 per cent before normalising.

"We believe the announcement is worse than anticipated," analysts at Citi said in a research note. "A dividend cut and a CAPEX increase was expected, though the magnitude is above ours and market expectations."

TelefonicaDeutschlandreiterated its earnings guidance for the full year.