October 14, 2014 / 4:43 PM / 5 years ago

Deutsche Telekom to avoid answering any cash calls from T-Mobile US: analysts

FRANKFURT (Reuters) - Deutsche Telekom had already given up on trying to sell its near 67 percent stake in T-Mobile US TMUS.N before upstart French telecoms firm Iliad (ILD.PA) dropped its bid on Monday and is now looking to avoid having to stump up more funds for the U.S. mobile network operator, analysts and investors said.

The logo of Deutsche Telekom is pictured on the 266 metre high "Colonia" TV tower in the western German city of Cologne March 25, 2013. REUTERS/Wolfgang Rattay

The French low-cost telecoms operator said late on Monday it had abandoned its attempt to buy T-Mobile because of resistance from Deutsche Telekom, becoming the third bidder to drop out in three years.

Competition regulators blocked AT&T’s (T.N) agreed $39 billion deal to take over T-Mobile US in 2011 and also headed off this year’s attempt by Sprint (S.N) and its majority owner Softbank Corp (9984.T) to merge the two firms.

Deutsche Telekom had hoped to reduce its exposure to the U.S. business before next year’s scheduled auction of radio waves which analysts estimate will cost T-Mobile billions of dollars to get the lower-range frequencies it needs to give its mobile network further reach and better compete with rival operators Verizon (VZ.N), AT&T and Sprint.

“T-Mobile US’s credit profile is weaker than Deutsche Telekom’s, therefore a sale of T-Mobile US to a strategic partner would have been the preferred option,” said Nikolai Lukashevich, a credit analyst at Fitch.

But Deutsche Telekom management, led by Tim Hoettges since he took over as chief executive in January having previously been the group finance chief, has became more confident that a longer stay in the United States business could make sense as T-Mobile’s turnaround has made promising progress this year, sources familiar with the matter said last month.

“They believe that T-Mobile can take care of itself, a person close to the German firm’s management said. “That has been Tim’s objective ever since he merged the company with MetroPCS last year.”

Hoettges’ strategy for the T-Mobile USA business since he spun it off from its German parent via a reverse takeover by its smaller listed rival MetroPCS, has been “de-risking, self-funding and kingmaker”, he told analysts in August.

In the meantime T-Mobile US had turned profitable in the second quarter after four quarters of losses during which it spent heavily to buy customers out of rival contracts.

And T-Mobile US added 552,000 post-paid customers in August, more customer additions than any other month in the history of the company, Chief Executive John Legere told investors at a conference in New York last month.

“It is Deutsche Telekom’s only growth story at the moment. They have invested heavily in the past two years. We expect to see returns in the coming year for Deutsche Telekom,” one of the German company’s 20 biggest shareholders said on Tuesday.

A telecoms industry banker said that Hoettges is now likely to wait and see how the U.S. spectrum auction turns out and whether any new suitors emerge as a result, such as satellite TV operator Dish Network (DISH.O). Dish has been buying up mobile spectrum in recent years and said in August that it might be interested in bidding for T-Mobile.

“I don’t think it changes the fact that they (Deutsche Telekom) want to sell the US eventually,” the banker said.


Analysts estimate that T-Mobile US will need anywhere from $5 to $10 billion to bid for the best frequencies in next year’s spectrum auction as well as billions more to improve its network to keep up with consumer demand for quality and speed.

But Deutsche Telekom investors are confident the U.S. company can raise the money to fund those investments via issuing new shares or bonds without calling on its German parent for more cash.

“They sacrificed $2 billion in operating profit in the past two years. Deutsche Telekom wants to see that money coming back now,” said the institutional investor.

A credit investor who declined to be named also noted that T-Mobile US is a bond issuer in its own right in the U.S. high-yield market, and carries out its financing at arms’ length from Deutsche Telekom.

But Lukashevich, the Fitch analyst who rates Deutsche Telekom at BBB+ with a stable long-term outlook, believes a fresh share issue would be the best option.

“T-Mobile is pretty leveraged at the moment with a debt/EBITDA ratio of around 3.5. From a creditors’ perspective a share issue would be the best scenario to fund the spectrum auctions,” he said.

“I expect competition in the U.S. will only increase in the near future with Sprint increasing pressure. We will have to see how T-Mobile will deal with that.”

Deutsche Telekom, which is due to update investors on its strategy at a “Capital Markets” presentation on Dec. 9, declined to comment.

Deutsche Telekom shares closed down 1 percent at 10.80 euros, while the Stoxx Europe 600 telecoms sector index was unchanged, while shares in T-Mobile US were little changed at $26.94 by 1633 GMT (1233 EDT).

Iliad’s shares closed up 9.6 percent at 171.10 euros.

Additional reporting by Leila Abboud in Paris and Laura Benitez at IFR; Editing by Greg Mahlich

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