Deutsche Telekom Shunning U.S. Bids Tests T-Mobile Viability

Aug 06, 2014 12:04 pm ET

(Updates with closing share price in fifth paragraph.)

Aug. 6 (Bloomberg) -- Deutsche Telekom AG’s refusal to agree on bids for T-Mobile US Inc. means it risks going alone to take on AT&T Inc. and Verizon Communications Inc., a strategy likely to weigh on earnings. The German carrier’s stock fell.

Sprint Corp. ended talks over buying T-Mobile and joining the third- and fourth-largest U.S. wireless carriers after the companies failed to agree on terms, people familiar with the matter said. T-Mobile is also set to reject an alternative bid from France’s Iliad SA, other people said.

Deutsche Telekom, Europe’s largest phone carrier, has sought to leave the U.S., where it was unable to establish a competitor capable of matching the clout of larger peers after a decade of effort. The failure to come to terms with Sprint after months of talks puts pressure on Deutsche Telekom Chief Executive Officer Timotheus Hoettges to prove that the U.S. business won’t become a burden on shareholders.

“They are effectively going to have to continue to run it as a standalone entity,” said Andrew Hogley, an analyst at Espirito Santo Investment Bank in London. “If it’s going to have a viable, long-term future, they need to increase scale. The only way to do that is to invest.”

Deutsche Telekom fell 2.8 percent to 11.54 euros in Frankfurt, the biggest drop in more than a month. The shares are down 7.2 percent this year, valuing the Bonn-based carrier at 52.3 billion euros ($70 billion).

Iliad Option?

Deutsche Telekom in 2011 failed to get backing for a $39 billion sale of T-Mobile to AT&T from the U.S. Department of Justice and the Federal Communications Commission. Regulators had also been critical of a deal with Overland Park, Kansas- based Sprint because it would eliminate a nationwide operator.

Iliad, which has offered $15 billion in cash for 56.6 percent of T-Mobile, may still provide a way out. The French carrier is seeking partners to help finance its bid and allow it to make an offer for a larger stake, another person said. A representative for Iliad declined to immediately comment.

While Sprint had discussed $40 a share compared with the $33 in Iliad’s offer, Deutsche Telekom would consider forgoing some sales proceeds for a higher chance that a deal will be approved by regulators, other people have said.

“The big advantage of the Sprint deal was that you would have gotten a huge amount of network synergies,” said Guy Peddy, an analyst at Macquarie Research in London. “Clearly in other deals you don’t get that, so the potential value of any other transaction would be less.”

Network Investments

T-Mobile’s recent earnings reports, under CEO John Legere, give Deutsche Telekom reason to be optimistic that its U.S. unit won’t need a partner in the short run. The company added 908,000 monthly branded customers in the quarter through June, while Sprint lost 245,000 contract users.

If T-Mobile continues its run and AT&T and Verizon don’t try to chase its discount strategy, Deutsche Telekom may be able to sell the unit at a higher price at a later date, said Stefan Borscheid, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, Germany.

Still, T-Mobile’s surge in customer numbers has come at the cost of profitability. The operator would have posted a widening net loss in the most recent quarter if it hadn’t recorded special gains from a spectrum-swap agreement. In coming years, the company will be forced to invest billions of dollars in airwaves and networks to remain competitive, and it’s not clear yet whether it may need financial assistance from its parent to pay those expenses.

Deutsche Telekom also faces investment needs in Europe. Hoettges, at the helm since January, has vowed to turn Germany’s former phone monopoly into the leading European network operator.

One option for Deutsche Telekom is to reduce its stake in T-Mobile to 51 percent from the current 67 percent once a lockup period expires in November, Peddy said. It probably wouldn’t have to sell at a large discount and could use freed up funds to invest in Europe, Peddy said. T-Mobile shares fell 6.6 percent to $31.67 as of 12:02 p.m. in New York today.