Deutsche Telekom AG (DTE) (DTE)’s agreement to combine T-Mobile USA with MetroPCS Communications Inc. (PCS) (PCS) reveals how the value of its unit may have dropped by $13 billion amid client losses following a failed sale to AT&T Inc. (T) (T) last year.
T-Mobile USA is worth about $26 billion including debt, based on MetroPCS’s share price and analyst estimates. Deutsche Telekom (DTE), Germany’s biggest phone company, last year dropped a plan to sell the mobile carrier to AT&T for $39 billion after opposition by regulators. T-Mobile USA has lost about 7.6 percent of its subscriber base since that attempt.
Deutsche Telekom said yesterday it will own 74 percent of a combined entity with MetroPCS to increase the size of its U.S. operations and challenge AT&T, Verizon Wireless and Sprint Nextel Corp. (S) Rene Obermann, chief executive officer of the Bonn- based company, may be accepting a lower valuation to facilitate an exit from the U.S. in the future, said Frederic Boulan, an analyst at Nomura in London.
“T-Mobile’s implied valuation is not as good as in the AT&T deal,” he said. “Still, the merger has the potential for synergies and if the new company delivers, there is a path for a profitable exit for Deutsche Telekom.”
Deutsche Telekom spokesman Andreas Leigers declined to comment on the value of T-Mobile USA. T-Mobile has stepped up investments to deploy a faster network in 2013, announced 2,800 job cuts and freed up cash by selling the right to operate its network of cellular towers.
Because T-Mobile USA isn’t publicly traded, the value may be derived from the price of MetroPCS shares, which closed at $12.24 in New York yesterday.
Based on that price and excluding expected dividends, the Richardson, Texas-based company’s equity is priced at about $3 billion, implying a value of about $8.4 billion for Deutsche Telekom’s 74 percent stake in the combined company. T-Mobile also brings debt of as much as $17.4 billion into the deal, resulting in an enterprise value of $25.8 billion minus some cash reserves.
Deutsche Telekom shares declined 4.1 percent to 9.36 euros at the close of trading in Frankfurt, the steepest decline in 11 weeks. Sprint Nextel Corp. (S:US), the third-largest U.S. wireless carrier, is in the early stages of evaluating a counter offer for MetroPCS, said three people familiar with the matter.
MetroPCS declined 1.7 percent to $12.03 at 12:57 p.m. in New York.
Deutsche Telekom has recognized the shrunken value of T- Mobile USA. The company recorded an impairment loss of 2.3 billion euros ($3 billion) following the collapse of the AT&T agreement in the fourth quarter, and said yesterday it expects another writedown of 7 billion euros to 8 billion euros for the quarter ended Sept. 30.
“Falling subscriber numbers explain some of T-Mobile’s decline in value since the AT&T offer,” said Jan Goehmann, an analyst at Norddeutsche Landesbank Girozentrale in Hanover. “But AT&T was also ready to pay a lot, as they expected big synergy gains. With MetroPCS and T-Mobile operating on different networks and being smaller in scale, the synergy gains are lower.”
The deal will generate annual cost savings of about $1.2 billion to $1.5 billion as the companies combine their wireless networks and purchase handsets together, according to Deutsche Telekom.
When the AT&T deal failed, the German company received a breakup fee of $3 billion in cash plus wireless frequencies and lower fees for calls into the network of its U.S. peer.
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