Deutsche Telekom warms to idea of longer stay in U.S.

September 27
8:03 AM 2014

Deutsche Telekom (DTEGn.DE) is preparing for the possibility of keeping its investment in T-Mobile US (TMUS.N) for at least another year as it fears the sole current suitor for the U.S. firm will fail to come through with a sufficiently attractive offer, three people familiar with the matter said.

Iliad (ILD.PA), the maverick French tycoon Xavier Niel's low-cost telecoms operator, has set a mid-October deadline to decide whether to improve its bid of $33 a share for 56.6 percent of T-Mobile US, the fourth-biggest cellphone network operator in the United States. And Deutsche Telekom could still be swayed if Iliad can find partners to substantially improve its offer, the sources said.

The decision is a crucial one for Europe's third-largest telecoms firm by market value, because the U.S. business, which accounts for about a third of its sales and a fifth of its core profits, has long been a drag on cash flows.

An exit would dramatically alter its size and profile at a time of consolidation across the industry as companies seek to bring together fixed and mobile services.But some executives at Deutsche Telekom have begun to warm to the idea in recent weeks of now keeping T-Mobile US until after a major auction of U.S. radio spectrum is completed late next year, the sources said.

Under local rules, companies cannot hold deal talks ahead of spectrum sales, so a delay would allow other possible suitors such as satellite TV group Dish (DISH.O) or cable companies now busy with their own mergers to make bids.

Given time there might also be a change in the regulatory climate which frustrated T-Mobile US's erstwhile suitor Sprint (S.N), owned by Japan's Softbank (9984.T), in its attempt earlier this year to merge the two to better compete with the giants of the U.S. market,AT&T (T.N) and Verizon (VZ.N).

That left only Iliad, backed by its billionaire founder, in the running.

But Deutsche Telekom doubts Iliad's pledge to deliver annual savings of $2 billion, or 7 percent of T-Mobile's estimated cost base, since the French start-up has no track record in the country, sources earlier told Reuters.

T-Mobile US is also finally posting rising sales after years of losses, so there is an argument that Deutsche Telekom should keep the business at a time of growth when its European operations are shrinking under regulatory pressure and still fierce competition, the sources said.

Last month T-Mobile US added 552,000 post-paid subscribers, marking its biggest monthly addition ever, albeit amid aggressive promotions that allow customers to add four lines for $100 a month.

"Basically Deutsche Telekom thinks that if there is not going to be an in-market consolidation deal in the U.S., which would generate huge synergies and change the structure of the market, then perhaps they are better off keeping the business and trying to realize themselves the upside potential that Niel thinks is there," said one person close to the German company.

"This is why things have gotten bogged down."


Whatever Iliad's final bid, Deutsche Telekom has a tough decision to make between making a quick exit from the United States to concentrate its resources on Europe and confronting the big investment challenges in the United States if it stays, said Hannes Wittig, an analyst at JP Morgan.

"A well-negotiated Sprint deal would have been a no-brainer, but now some harder strategic choices might have to be made," said Wittig, who has a 'neutral' rating on Deutsche Telekom's shares.

If it were to sell now, Deutsche Telekomn would have to decide how much of the proceeds it could return to shareholders and how much would have to be ploughed into fiber broadband in Germany to compete with Liberty Global (LBTYA.O) and Vodafone (VOD.L).

Shorn of T-Mobile, Deutsche Telekom would also be much smaller, a potential handicap as European telecom consolidation picks up pace.

Bigger rival Vodafone exited the United States earlier this year, halving its market value, but at $89 billion, it is still substantially larger than Deutsche Telekom's $69 billion.

Nevertheless there are some within the company that believe that Deutsche Telekom should pursue Iliad's interest since the French bid would not face the competition objections that stymied its two sale attempts since 2011 -- to Sprint and before that to AT&T.

But the German side wants Iliad to substantially improve its bid to at least $40 per share for a higher proportion of T-Mobile's share capital, according to two of the sources.

While one person close to the Iliad side said a deal would only be viable at a lower level, somewhere between $35 to $40 per share.

"We got a sense that Deutsche Telekom is genuinely convinced that Iliad will not manage to put together an improved offer matching their price and synergies expectations so they are basically leaking to prepare the market if Iliad walks away in the end," said a fourth person close to the situation.

T-Mobile US's share price has fallen almost 18 percent since Sprint walked away in early August and is down more than 20 percent from a high of $35.50 in late May.

Deutsche Telekom had hoped to reduce its exposure to the U.S. business before next year's costly frequency auction. But as T-Mobile's turn-around progresses, Deutsche Telekom's management is becoming more confident that a longer stay could make sense despite the U.S. firm's need for further major investment, said two of the sources.

Analysts estimate that T-Mobile US will need anywhere from $5 to $10 billion to bid for the best frequencies in the auction next year as well as billions more to improve its network to keep up with consumer demand for quality and speed.

However, Deutsche Telekom is confident the U.S. company can raise the money to fund those investments via issuing new shares or bonds, said a person close to the German operator's management.

With T-Mobile US shares were trading up 2.7 percent at $29.255 on Friday, valuing the company at over $23.6 billion.

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