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Sprint decison puts Deutsche Telekom's U.S. exit in doubt
August 7, 2014 / 2:56 AM / 3 years ago

Sprint decison puts Deutsche Telekom's U.S. exit in doubt

FRANKFURT (Reuters) - Deutsche Telekom (DTEGn.DE) must decide whether to stay in or go from the United States now that its preferred strategy of selling T-Mobile US TMUS.N to its bigger rival Sprint (S.N) has crashed into a regulatory wall.

Shares in Deutsche Telekom fell as much as 5 percent to a 16-week low on Wednesday after Sprint abandoned deal talks and were still down 3 percent at 11.53euros at 1227 GMT (8.27 a.m. EDT ), wiping some 1.6 billion euros off its market value.

The German company, which earns about a third of sales and a fifth of core profits in the United States, has tried to sell its US subsidiary twice since late 2011 because it believed that as the fourth-biggest mobile network operator T-Mobile US lacks critical mass to compete with leaders AT&T (T.N) and Verizon (VZ.N).

Deutsche Telekom, which declined to comment on Wednesday, must now decide whether to open T-Mobile US’s books to French low-cost telecoms firm Iliad (ILD.PA), which has made a $33 offer for 56.6 percent of the US business. Before Sprint dropped out Deutsche Telekom told Iliad it did not want to engage in talks at that price level and Iliad was searching for partners with a view to possibly raising its bid.

Alternatively analysts said Deutsche Telekom now could now decide to hold on to the U.S. business until the political climate turns more favourable towards market consolidation and in the meantime lobby as a standalone operator to get a reserved bloc of the best spectrum in next year’s keenly awaited auction of long wave radio frequencies.

“The news (on Sprint) was a huge shock to us,” said a person close to Deutsche Telekom management.

“This is the worst scenario we could think of. The company will have to look into the Iliad offer now and may even have to consider staying around longer in the U.S.”

However, Andreas Mark, fund manager at Union Investment, a top 20 shareholder of Deutsche Telekom, said the failure of the prospective Sprint deal should not change the group’s strategy because T-Mobile is now “well placed” to deliver strong growth.

“There is no reason to frantically look for a buyer. Plan A is normal development. Plan B would be to consolidate – and that will come eventually.”

“Accepting the Iliad offer would only make sense if Deutsche Telekom was in urgent need of money or could put the money to work better elsewhere. This is not the case.”

“Anything Iliad could do to improve the position of T Mobile U.S., Deutsche Telekom can do itself as well.”

The logo of Deutsche Telekom AG is seen on top of the company's headquarter in Bonn May 24, 2012. REUTERS/Wolfgang Rattay

Iliad’s shares were down 3.9 percent at 181.65 euros, reflecting investors’ misgivings about its attempt to buy the much-larger T-Mobile firm and expand out of France.

SPRINT SETBACK

Sprint and its majority owner, Japan’s Softbank (9984.T), wanted to buy T-Mobile to form a stronger third player to rival AT&T (T.N) and Verizon (VZ.N). It abandoned talks on an offer of roughly $40 a share on Tuesday, citing opposition from regulators who want a four-player market. Sprint also named a new CEO to pilot a solo turnaround effort.

Although T-Mobile US’s recently more aggressive market challenger strategy has helped it win customers in recent quarters, Deutsche Telekom has been concerned that its lack of low-frequency spectrum and fixed-line infrastructure is still hampering its ability to compete.

Deutsche Telekom earlier this year scrapped its 2015 free cash flow target to invest in the U.S. business, which under Chief Executive John Legere is spending heavily on its “Un-carrier” marketing campaign by offering cheaper, no-contract plans aimed at attracting subscribers away from rivals.

After years of poor performance T-Mobile US last week posted its first net profit in a year and reported the most post-paid phone subscriber additions in the industry.

“The status quo is not so bad for Deutsche Telekom,” said Hannes Wittig, an analyst at JP Morgan. “The decision to exit the U.S. is a difficult one for any CEO to take, especially given T-Mobile US’s growth compared to continued pressures in Europe.”

A person close to the Sprint bid predicted that Deutsche Telekom is now likely to gradually sell down its remaining 66 percent stake in T-Mobile US and not participate in any share issues needed to raise capital for spectrum purchases.

One analyst estimates that T-Mobile US will need anywhere from $5 to $10 billion for the upcoming spectrum auction depending on how it is set up by the US Federal Communications Commission.

T-Mobile and Sprint hoped to bid together in the auction but the FCC rejected the idea, saying joint bids might “have the effect of suppressing meaningful competition”.

The auction would be the first opportunity in years for wireless carriers to buy low-frequency airwaves, considered the best radio spectrum for their reach.

Additional reporting by Peter Maushagen in Frankfurt and Leila Abboud in Paris; Writing by Leila Abboud; Editing by Tom Pfeiffer and Greg Mahlich

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