August 1, 2014 / 2:55 PM / 3 years ago

Fitch: Iliad T-Mobile USA Bid Increases DT's Strategic Options

(The following statement was released by the rating agency) LONDON, August 01 (Fitch) Iliad's offer to acquire Deutsche Telekom's (DT) stake in T-Mobile USA expands DT's strategic options with regard to this stake. It is also evidence that overseas telecom operators are eying an entry into the US market, Fitch Ratings says. The offer from France's Iliad signals that T-Mobile USA may be of strategic interest to companies that are not present in the US and would therefore not be able to extract any immediate synergies with other US operations. Iliad's offer is unlikely to lead to an outright bidding war, in our view, as DT (BBB+/Stable) is likely to take into account strategic issues other than price, such as the benefits of owning a minority stake in the enlarged US operator. But it suggests that a realistic option for DT would be to seek a buyer for this stake outside of the US if a deal with a US operator does not go through. A deal with a foreign operator like Iliad would be less likely to face regulatory hindrances than a merger with a direct competitor active in the US market. DT has been reported to be in talks with Sprint about the sale of T-Mobile USA. A Sprint/T-Mobile USA deal is likely to face severe regulatory scrutiny. Regulatory approval would be likely to require significant actions which may reduce potential synergies and valuations. The sale of T-Mobile USA could be positive for DT. A divestment may improve the group's leverage and operating profile in view of the continuing strategic challenges facing T-Mobile USA. The ultimate impact would depend on the amount of deal proceeds applied to debt reduction and DT's ability to dispose of its holdings of T-Mobile's private bonds. So far, DT has halved its initial USD11.2bn holding of T-Mobile USA's bonds, selling USD5.6bn in October 2013. We believe DT's acquisition strategy may be reviewed should it sell the T-Mobile USA's stake. DT's lease-adjusted FFO-based leverage metrics would likely benefit by a significant reduction in leases after deconsolidation of T-Mobile USA. The US company accounts for a disproportionally large share of long-terms leases relative to its revenue, EBITDA and free cash flow contribution to DT group's consolidated accounts. Under Fitch's methodology, DT's reported EUR3.2bn of operating lease payments in 2013 were capitalised at 8x, leading to EUR25.6bn off-balance sheet debt, equal to more than half of DT's on-balance-sheet debt of EUR 48.9bn at end-2013. Iliad yesterday confirmed its offer to purchase DT's 56.6% stake in T-Mobile USA for USD15bn in cash, at USD 33 per share. Contact: Nikolai Lukashevich Senior Director Corporates +7 495 956 9968 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Mark Brown Senior Director Fitch Wire +44 203 530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Iliad's offer to acquire Deutsche Telekom's (DT) stake in T-Mobile USA expands DT's strategic options with regard to this stake. It is also evidence that overseas telecom operators are eying an entry into the US market, Fitch Ratings says. Iliad's offer signals that T-Mobile USA may be of strategic interest to companies that are not present in the US and would therefore not be able to extract any immediate synergies with other US operations. Iliad's offer is unlikely to lead to an outright bidding war, in our view, as DT is likely to take into account strategic issues other than price, such as the benefits of owning a minority stake in the enlarged US operator. But it suggests that a realistic option for DT would be to seek a buyer for this stake outside of the US if a deal with a US operator does not go through. A deal with a foreign operator like Iliad would be less likely to face regulatory hindrances than a merger with a direct competitor active in the US market. DT has been reported to be in talks with Sprint about the sale of T-Mobile USA. A Sprint/T-Mobile USA deal is likely to face severe regulatory scrutiny. Regulatory approval would be likely to require significant actions which may reduce potential synergies and valuations. The sale of T-Mobile USA could be positive for DT. A divestment may improve the group's leverage and operating profile in view of the continuing strategic challenges facing T-Mobile USA. The ultimate impact would depend on the amount of deal proceeds applied to debt reduction and DT's ability to dispose of its holdings of T-Mobile's private bonds. So far, DT has halved its initial USD11.2bn holding of T-Mobile USA's bonds, selling USD5.6bn in October 2013. We believe DT's acquisition strategy may be reviewed should it sell the T-Mobile USA's stake. DT's lease-adjusted FFO-based leverage metrics would likely benefit by a significant reduction in leases after deconsolidation of T-Mobile USA. The US company accounts for a disproportionally large share of long-terms leases relative to its revenue, EBITDA and free cash flow contribution to DT group's consolidated accounts. Under Fitch's methodology, DT's reported EUR3.2bn of operating lease payments in 2013 were capitalised at 8x, leading to EUR25.6bn off-balance sheet debt, equal to more than half of DT's on-balance-sheet debt of EUR 48.9bn at end-2013. Iliad yesterday confirmed its offer to purchase DT's 56.6% stake in T-Mobile USA for USD15bn in cash, at USD 33 per share. Contact: Nikolai Lukashevich Senior Director Corporates +7 495 956 9968 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Mark Brown Senior Director Fitch Wire +44 203 530 1588 Applicable Criteria and Related Research: Deutsche Telekom, AG here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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