LONDON Deutsche Telekom (DTEGn.DE) may be forced to sell assets closer to home and take a knife to its cost base if its $39 billion deal to sell T-Mobile USA to AT&T (T.N) collapses.
Investment bankers in the telecoms sector say the German group's immediate priority will be to protect its dividend, which it will struggle to do if the deal fails.
This could be a catalyst for the sale of its stake in Britain's biggest mobile company Everything Everywhere, unless it manages to clinch a deal with another U.S. operator, none of which are anywhere near as good a fit as AT&T.
"In private, Deutsche Telekom is resigned to the deal failing and it will definitely come under pressure from shareholders when that happens," said one well-placed senior banker who requested anonymity.
"There were already some discussions about options around non-core assets, which includes the UK, before the deal with AT&T was announced."
The banker added that those talks had been informal and exploratory and that Deutsche Telekom was not engaged in any formal discussions about the British business at the moment.
Another banking source, familiar with the deal, said: "There's no Plan B yet, but they've started to work on it."
Everything Everywhere, a 50-50 joint venture with France Telecom FTE.PA, is Deutsche Telekom's only non-core asset valuable enough to generate the kind of money it needs to invest in its U.S. unit, the smallest of the U.S. national players.
T-Mobile USA, a growth engine in its early days but now a run-down asset, is badly lacking in the spectrum it needs to build a fourth-generation network capable of handling the vast data volumes that U.S. consumers and businesses consume.
T-Mobile USA has about 11 percent of the U.S. mobile market. Market leader Verizon has 34 percent, AT&T has 32 percent and Sprint has 16 percent.
Deutsche Telekom is big in European terms but its healthy cashflows are not enough for the huge investment needed in a market the size of the United States.
"The scale of the investment that's needed is $10 billion," said Will Draper, head of telecoms research at investment bank Espirito Santo, adding that it would require another $3 billion a year to maintain it.
"Deutsche Telekom is already pretty highly leveraged, so it simply doesn't have the muscle to put those kind of assets into the U.S. without some kind of asset sale or rights issue."
Even if T-Mobile USA were to do a deal with the third-largest U.S. mobile operator Sprint Nextel (S.N) or telecoms start-up LightSquared, significant investments in the network would still be needed.
LIKE A TEENAGER
Draper values Everything Everywhere at around 11 billion euros ($14.6 billion) at end-2011, rising to 11.6 billion euros next year as it grows under new management -- making Deutsche Telekom's stake worth around 5.5 billion euros.
Deutsche Telekom and France Telecom FTE.PA pooled their UK units in September 2009, taking an equal share in Everything Everywhere, which has about 27.5 million subscribers and annual revenues of about 7 billion pounds ($10.8 billion).
Tim Daniels, London-based analyst at Olivetree Securities said he believes Deutsche Telekom is already inching toward an exit from Everything Everywhere.
"It's not something that will get done quickly. It's like a teenager getting ready to leave home," Daniels said.
Frederic Huet, managing partner at international telecoms consultancy Greenwich consulting, says that in the short term Deutsche Telekom needs to find a way to cut costs.
"They need to find a way to get their cost base in a better position. They need to find some way of sharing cost across operators," he told Reuters.
Daniels thinks Deutsche Telekom is more likely to float its stake than sell it to another mobile player or private equity firm because the UK mobile market offers low growth.
This was the main driver behind the creation of the joint venture in the first place.
Earlier this month, the venture said it had entered talks to gain external funding, fuelling long-held speculation about an exit by one or both of its parents.
Deutsche Telekom has been seen by analysts as more likely to exit than France Telecom since the company was created.
Another banker warned against expectations of a quick sale. "Everything Everywhere jumps off the page as a disposal candidate, but don't expect a sale in the immediate term."
"It is still in the process of establishing itself as a stable, independent company and it has not yet realized the full extent of the synergies that were promised."
Deutsche Telekom, France Telekom and Everything Everywhere all declined to comment for this article.
($1 = 0.7506 euros) ($1 = 0.6449 British pounds)
(Additional reporting by Philipp Halstrick in Frankfurt and Leila Abboud in Paris; Editing by Chris Wickham)