FRANKFURT/LONDON (Reuters) - Deutsche Telekom DTEGn.DE is mulling options for its underperforming T-Mobile USA unit, including an initial public offering or spin-off, sources familiar with the company's thinking said.
They said Deutsche Telekom had held initial talks with banks but no formal process was under way and an IPO was only one of several options, after the Wall Street Journal reported that the German company was preparing a U.S. IPO or spin-off.
However, most analysts agree an IPO would not be the best solution for Deutsche Telekom, which is also exploring a sale, an organic expansion or a partnership with another operator.
Valuation estimates varied hugely. Merck Finck bank said a sale of 20 percent of T-Mobile USA could bring proceeds of about 5 billion euros, or about $6.9 billion. But Macquarie analyst Phil Cusick estimated all of T-Mobile USA may have an equity value of $14 billion based on 2010 earnings estimates.
“It may be more a trial balloon to gauge the market’s assessment of what T-Mobile’s value is either for M&A activity or an out and out IPO,” said Scott Sweet, senior managing partner at advisory firm IPO Boutique.
Sweet said T-Mobile USA is not a "must have" IPO, given its similarities to rivals Verizon Wireless and AT&T Inc T.N.
“It would seem to me Deutsche Telecom is looking to spin it off because they don’t see a strong cash flow from T-Mobile’s operations anymore,” Sweet said.
T-Mobile USA, once prized as Deutsche Telekom’s growth engine, struggled with a high rate of customer cancellations in 2009 and trailed its bigger rivals in building high-speed services. As a result, Deutsche Telekom has been searching for the right strategy for the distant No. 4 U.S. mobile service.
Deutsche Telekom and T-Mobile USA declined to comment.
Some analysts believe Deutsche Telekom will have to decide between quitting the United States or staying and investing more in order to boost growth at T-Mobile USA.
However, any decision that could hurt Deutsche Telekom’s ability to pay its dividend is highly unlikely due to a commitment to shareholder payouts.
LBBW analyst Stefan Borscheid said he expects Deutsche Telekom to make a decision by the end of the year.
“Although we believe that options such as an IPO of T-Mobile USA or a straight sale of the business would lead to a better (short-term) share price reaction, we still believe that the search for a (financial or strategic) partner is a much more likely scenario,” he said in a research note.
If Deutsche Telekom does decide it wants to sell the business, which brings in about a quarter of its revenue, there is no obvious buyer even in a fiercely competitive market that may be in need of consolidation.
While the top two U.S. mobile services, Verizon Wireless and AT&T, may have deep enough pockets, many analysts doubt that regulators would let them acquire more market share. Each currently controls about a third of the U.S. market.
Sprint Nextel Corp S.N, the No. 3 U.S. service, which has been struggling to compete, would face even bigger technology hurdles in a deal.
Analysts have cited smaller rivals MetroPCS Communications PCS.N or Leap Wireless LEAP.O as potential merger candidates for T-Mobile USA, but technology issues would also complicate those deals. Leap, however, has hired advisors to consider a potential sale <ID:N01202119>.
Some U.S. analysts say a full or partial spin-off could put T-Mobile USA in a better spot for a merger with a rival or to run its business more competitively.
“A partial spin could give T-Mobile USA its own currency, with which it could pursue consolidation without dilution,” Bernstein Research analysts wrote in a note.
In the case of a full spin-off, Macquarie’s Cusick says, T-Mobile USA would have more freedom to discount its prices more sharply and compete better for U.S. mobile customers.
But Cusick said an IPO or even a full separation could be difficult in the current wireless market.
The Wall Street Journal, citing people familiar with the matter, said that Deutsche Telekom had talks with potential underwriters, including Deutsche Bank, and expected to make a decision in the coming months.
Shares in the German telecoms provider closed down 0.31 percent at 9.21 euros in Germany.
(Reporting by Philipp Halstrick and Nicola Leske in
Frankfurt, Georgina Prodhan in London and Sinead Carew and Phil Wahba in New York; Editing by David Cowell, Gary Hill)
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