Technology

Deutsche Telekom's Limited Options for T-Mobile


DT is said to be mulling a public offering for market-lagging T-Mobile USA, but demand for shares seems weak and any merger faces obstacles

Deutsche Telekom (DT) is said to be considering strategic options for its troubled U.S. unit. The company may find its choices limited amid heightened competition in the wireless industry and tepid demand among investors. The German telecommunications provider is considering an initial public offering for T-Mobile USA, people familiar with the matter have told Bloomberg News. Fund managers may balk at buying stock in T-Mobile USA, which lost customers and suffered a sales decline in the third quarter, says Tim Gilbert, a senior analyst at Principal Global Investors in Des Moines, which oversees about $215 billion of assets. T-Mobile has struggled to attract high-value smartphone customers who have flocked to Verizon Wireless and AT&T (T), the largest U.S. mobile-phone service providers. Now T-Mobile is left tussling for less-valuable users with Sprint Nextel (S) and MetroPCS (PCS), Gilbert says. "DT should have done this [IPO] two or three years ago," he says. "But they are now competing on the low end of the customer base." Bonn-based Deutsche Telekom, Europe's largest phone company, hasn't yet decided on a U.S. strategy and it's too early to say whether an IPO is on the cards, people familiar with the matter told Bloomberg News. fresh postpaid subscribers are scarce

T-Mobile USA, the fourth-largest U.S. wireless company behind Verizon Wireless, AT&T, and Sprint Nextel, lost 77,000 customers in the third quarter, when its sales fell 2.4% to $5.38 billion from a year earlier. While results may have improved in the fourth quarter, when many consumers buy mobile phones, challenges will persist in the U.S., where more than 90% of the population is already equipped with mobile phones. Carriers are forced to compete for customers by cutting prices and thereby eroding revenue. The industrywide base of so-called postpaid subscribers, who purchase wireless service on contract and are considered more valuable to carriers, may rise only 3% this year, according to researchers at IDC. "The timing for an IPO is far from ideal," Matthew Bloxham, an analyst at Deutsche Bank, wrote in a Feb. 5 report. Should Deutsche Telekom opt for a share sale, T-Mobile could use the proceeds to expand and improve its network, Soleil Securities analyst Michael Nelson wrote in a Feb. 4 research report. In the event Deutsche Telekom sells a 20% stake, it could raise about $4 billion, according to an estimate by Tom Taulli, an analyst who covers the IPO market. Deutsche Telekom could also bolster its U.S. business through mergers and acquisitions, analysts say. Contenders include MetroPCS and Leap Wireless (LEAP), which according to reports is also considering strategic options. Such deals would be complicated because both companies rely on a different wireless technology from that used by T-Mobile. And Deutsche Telekom may be unwilling to make the additional investment needed to clinch purchases, Phil Cusick, an analyst at Macquarie Equities Research, wrote in a Feb. 5 note: "We already find it unlikely that DT would be willing to put additional capital into the US to buy companies like Sprint, Leap, or MetroPCS," he wrote. AT&T uses the same technology as T-Mobile USA. However, a takeover attempt by it or Verizon Wireless may be opposed by antitrust regulators, analysts say.

Kharif is a reporter for Bloomberg BusinessWeek in Portland, Ore.

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