Deutsche Telekom faces tough call on U.S. mobile exit
FRANKFURT/PARIS (Reuters) - Deutsche Telekom's new boss may soon face a tough decision on whether to try selling the company's U.S. mobile business to Japan's Softbank (9984.T), and risk the cost and disruption of being thwarted by U.S. regulators keen to protect competition.
The German group ultimately would like to sell T-Mobile US (TMUS.N) because it sees its fourth position behind Verizon (VZ.N), AT&T (T.N), and Softbank's Sprint (S.N) as limiting long-term profitability, said people familiar with its thinking.
A U.S. exit would also give Deutsche Telekom (DTEGn.DE) more firepower to upgrade its networks in Germany, where it faces stiff competition from cable operators, and expand in Eastern Europe, as it did with a deal announced on Monday to take full control of its Czech subsidiary for $1 billion.
But new chief executive Tim Hoettges, who took the helm at the start of this year, remains wary of repeating the 2011 fiasco of U.S. regulators blocking the $39 billion sale of T-Mobile US to AT&T, said people close to the company.
He played a leading role in negotiating the blocked AT&T tie-up, so knows better than anyone the risks and costs involved of failure - which included an exodus of T-Mobile US customers as management focused on trying to get the deal done.
Even a large break-up fee from Sprint and estimated synergies of up to $20 billion might not be enough to tempt him.
"They have already failed once, they don't want to fail again," said a banker familiar with the group's thinking.
An approach by Softbank for T-Mobile US would be the latest in a series of deals in a global telecoms industry looking to build scale to fend off competition and take advantage of low borrowing costs. Verizon is buying out its U.S. mobile partner Vodafone (VOD.L), while Mexican telecoms tycoon Carlos Slim has made multi-billion dollar investments in Europe.
However, the recent commercial success of T-Mobile US - which added 1.65 million customers in the last quarter helped by CEO John Legere's sales tactics targeting rivals' customers - means that Deutsche Telekom is not in a rush to sell.
"They could wait a couple of years now that the company is performing well," said the banker.
Hoettges would not show his hand when asked on Tuesday when he would decide on the future of T-Mobile US.
"We are very happy with the current development of our asset," he said on the sidelines of a conference in Brussels.
"But we are facing lots of questions around spectrum in the future, and how we can stay competitive in this environment where two big players are dominating the market."
Softbank's ambitious founder Masayoshi Son is eager to marry third-place Sprint with T-Mobile to take on AT&T and Verizon. The tie-up would create a firm with $62 billion in sales, 52 million contract customers, and 23 percent market share.
But U.S. officials, including antitrust chief William Baer and Federal Communications Commission chairman Tom Wheeler, have signaled concerns about cutting the main competition in the U.S. market to three mobile players and the impact that could have on consumers and prices.
Bloomberg reported on Thursday that Softbank and Sprint would decide in the next few weeks on whether to go ahead with a bid, while the Wall Street Journal reported on Monday that the companies were "regrouping" and had not decided whether to bid.
Sprint CEO Dan Hesse declined to say on Tuesday whether the group was working on a bid, but said consolidation in U.S. mobile would be "healthy for the competitive dynamic" of the market.
Deutsche Telekom's concerns about regulatory opposition mean it would want a significant break-up fee to fall back on in case the deal was blocked, said two people close to the situation.
"Sprint, however, does not want to bear the antitrust risk alone so is pushing for lower break-up fees," said one of the people, adding such fees could be less than $3 billion.
Deutsche Telekom is not opposed to keeping a minority stake in the combined company, said the people, so if a deal was attempted, it could be done in cash and shares.
Despite T-Mobile's recent turnaround, Deutsche Telekom's foray into the United States, which began with the acquisition of VoiceStream for $50.7 billion in 2000, has not been smooth.
Deutsche Telekom has written down the value of T-Mobile US by almost two-thirds in the past decade, and for years spent billions to prop it up and pay for costly network upgrades.
The unit's struggles explain why Deutsche Telekom was eager to sell to AT&T in 2011 when Hoettges was group finance chief. When the deal failed, Hoettges began negotiating the purchase of smaller player MetroPCS to help T-Mobile bulk up. That deal - along with a $6 billion break-up fee from AT&T including cash and mobile spectrum - put T-Mobile back on the growth track.
The MetroPCS deal also turned T-Mobile US into a listed firm in the United States, allowing T-Mobile to borrow more to finance its development and making it more self sustaining.
Deutsche Telekom now owns a 67 percent stake in T-Mobile US.
In the first nine months of 2013, T-Mobile US accounted for one-third of Deutsche Telekom's revenue of 44.5 billion euros ($60.7 billion) and one-fifth of its earnings before interest, taxes, depreciation and amortization (EBITDA) of 13.4 billion euros, excluding special items.
The business contributed 334 million euros in free cash flow to Deutsche Telekom, down 72.5 percent from a year earlier because of increased marketing spending by T-Mobile.
A U.S. exit would bring in much-needed cash that Deutsche Telekom could deploy to upgrade broadband networks in Germany to faster fiber. In December 2012, it announced a three-year, 18 billion euro network investment plan for Germany, and its other businesses in Britain and Eastern European also need resources.
"It makes a lot of sense for Deutsche Telekom to exit the U.S. at a good multiple and redirect capex to Germany where competition is increasing," a telecoms banker said.
"The U.S. is not a logical place to be for them and they will need more capex to be relevant there."
But if the deal fails to materialize, Deutsche Telekom will not be entirely sorry to keep T-Mobile US since it has better growth prospects than its European business, according to Malte Raether, an analyst at Warburg Research. And AT&T could make a bid for Vodafone in the second half of the year, which would give Deutsche Telekom a new "serious competitor" in Europe.
"It might come in handy for Deutsche Telekom to have the option to compete against AT&T in its home market," he said.
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