Bloomberg News

Deutsche Telekom Losing $12 Billion Even With New Bid: Real M&A

September 01, 2011

(For more on the AT&T/T-Mobile deal, see EXT6 <GO>.)

Sept. 1 (Bloomberg) -- Deutsche Telekom AG may never get as good a deal for T-Mobile USA as it did with AT&T Inc.

AT&T agreed in March to pay $39 billion for Deutsche Telekom’s U.S. mobile-phone unit, a takeover that the Justice Department yesterday sued to block. The deal, struck at 28.8 times profit, gave T-Mobile USA the highest valuation of any wireless carrier outside China. With T-Mobile USA now mired in its biggest profit slump in almost a decade, a sale at the same multiple AT&T was willing to pay would generate $12 billion less for Deutsche Telekom, according to data compiled by Bloomberg.

While AT&T said it plans to fight the lawsuit, Deutsche Telekom risks getting saddled with a mobile-phone business that had profit declines in four of the past five years and lost more than a half-million subscribers in 2011. Turning to Sprint Nextel Corp., which analysts say will lose money for a fifth straight year, would mean persuading T-Mobile USA’s larger rival to buy an incompatible wireless network that would still leave the combined entity with fewer customers than Verizon Wireless or AT&T, the two largest U.S. carriers.

“They’ve got a problem on their hands with T-Mobile,” Brian Barish, Denver-based president of Cambiar Investors LLC, which oversees about $8 billion, said in a telephone interview. Deutsche Telekom isn’t “going to get as much money as they were hoping. It’s basically damaged goods, T-Mobile. They are going to have to figure out a plan B strategy that is mindful of that unavoidable reality,” he said.

‘Problem Child’

Andreas Fuchs, a spokesman at Bonn-based Deutsche Telekom, declined to comment on how much T-Mobile USA would be worth to a buyer other than AT&T.

Deutsche Telekom fell 7.6 percent yesterday, the biggest decline in 15 months. The shares slumped after the U.S. government filed a complaint in federal court, saying that AT&T’s purchase of T-Mobile USA would “substantially lessen competition” in the wireless market. The sale would combine the second- and fourth-largest U.S. carriers and help AT&T leapfrog Verizon as the largest mobile-phone company in America.

Deutsche Telekom advanced 2.2 percent to 9 euros. AT&T fell 0.7 percent to $28.27 after retreating 3.9 percent yesterday.

The government’s antitrust suit “probably kills the deal,” said Morten Singleton, an analyst at Investec Securities in London. For Deutsche Telekom, “this was its exit route to get rid of the problem child,” he said.

‘Enormous Price’

Deutsche Telekom planned to use the money to slash debt, expand in Europe and invest in its local broadband business. Chief Financial Officer Timotheus Hoettges said the $39 billion cash-and-stock agreement was an “enormous price.”

The value of the deal, which excludes T-Mobile USA’s $15.4 billion in debt, was 28.8 times the unit’s net income of $1.35 billion last year, data compiled by Bloomberg show. That was more than double AT&T’s multiple of 13 at the time and higher than the median 11.9 times profit for 32 mobile-phone companies outside China with market values greater than $1 billion.

Both AT&T and Deutsche Telekom have said they plan to contest the U.S. effort to quash the takeover.

“We are surprised and disappointed by today’s action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the DOJ that this action was being contemplated,” Wayne Watts, AT&T’s general counsel, said in a statement. “We intend to vigorously contest this matter in court.”

AT&T’s Concessions

Mark Siegel, a spokesman for Dallas-based AT&T, declined to comment beyond the statement from Watts.

The companies can still salvage the deal if enough concessions are made to satisfy the U.S. government, according to Jan Goehmann, an analyst at Norddeutsche Landesbank Girozentrale in Hannover, Germany.

AT&T has already pledged to bring 5,000 call-center jobs back to the U.S. from other countries once the merger closes and wouldn’t cut any U.S. wireless call-center jobs.

“It’s definitely still possible that the deal will go through with some conditions,” said Goehmann.

While Deutsche Telekom said it will get cash, airwaves and a roaming agreement valued at $7 billion from AT&T if the deal unravels, it may be forced to offer T-Mobile USA to another bidder for $12 billion less than its current agreement.

At the same multiple as the AT&T deal, T-Mobile USA would be worth just $27 billion, based on $935 million in net income in the past 12 months, data compiled by Bloomberg show.

Relative Value

T-Mobile USA, which had already cost Deutsche Telekom’s shareholders 64 percent through yesterday since the unit was created a decade ago, may sell for even less as it loses more customers.

The company, which lagged behind its competitors in building out a third-generation mobile network and missed out on sales of Apple Inc.’s iPhone, has reported declining earnings since the takeover was announced. T-Mobile USA’s net income plummeted 55 percent in the first half of 2011 as it lost 663,000 contract customers, data compiled by Bloomberg show.

No other buyers would offer to pay as much as AT&T because the two carriers use the same network standard to deliver mobile-phone and data service, said Kevin Shacknofsky, who helps manage $6 billion for Alpine Mutual Funds in New York. T-Mobile USA’s network is incompatible with Sprint and Verizon.

“There wouldn’t be as many synergies as AT&T because of the technology platform,” he said in a telephone interview. “So it would be a lower valuation” with anyone else, he said.

No White Knights

Sprint, which had on and off discussions with Deutsche Telekom for T-Mobile USA, was beaten out after AT&T agreed to pay $25 billion in cash and offered a higher-than-average breakup fee, three people with knowledge of the matter, who weren’t authorized to speak publicly, said in March.

Sprint’s debt exceeds its cash and short-term investments by $14.3 billion, data compiled by Bloomberg show. The company’s credit rating is three levels below investment grade, according to Moody’s Investors Service.

“There’s no obvious white knight,” said Walter Todd, who helps manage $940 million at Greenwood Capital in Greenwood, South Carolina. “They’ll have to go back to the drawing board for their strategic plan if they’re not able to sell it.”

Scott Sloat, a spokesman for Overland Park, Kansas-based Sprint, said it doesn’t comment on rumors or speculation.

The government also implied in its suit that it would likely prevent any other combination with T-Mobile USA, Craig Moffett, a New York-based analyst with Sanford C. Bernstein & Co., wrote in a report to clients yesterday.

Bleeding Out

“A plain reading of the DOJ’s complaint makes it clear that a Sprint/T-Mobile pairing would be equally unacceptable,” Moffett wrote. “T-Mobile USA may well be forced to remain independent. The prospects of any other deal, including one with Sprint, are also very poor.”

That means Deutsche Telekom may be forced to spend more money to support its U.S. business, sell the unit to its own shareholders or absorb more losses as it cedes market share, according to Huntington Asset Advisors’ Peter Sorrentino.

“You’re going to have to spin it off or roll up your sleeves and make a really big commitment to the business because status quo is a wasting asset,” Sorrentino, a senior portfolio manager at Huntington Asset in Cincinnati, which manages $14.8 billion, said in a telephone interview. “Better to exit than let the thing bleed you out over time.”

--With assistance from Jonathan Browning in London, Kenneth Wong in Berlin and Sarah Rabil in New York. Editors: Michael Tsang, Daniel Hauck.

To contact the reporters on this story: Danielle Kucera in New York at dkucera6@bloomberg.net; Cornelius Rahn in Frankfurt at crahn2@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Kenneth Wong at kwong11@bloomberg.net.


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