Deutsche Telekom AG, whose proposed $39 billion sale of T-Mobile USA to AT&T Inc. (T) collapsed yesterday, has about a year before it needs to start the search for another partner amid rising costs for improving its network.
A breakup package that includes the payment of $3 billion in cash to Deutsche Telekom will only cover T-Mobile’s expenses for 12 to 24 months, said Wolfgang Specht, an analyst at WestLB AG in Dusseldorf. If T-Mobile doesn’t find a new partner after that time, it risks failing to generate enough operating cash flow to cover capital spending, he said.
“Stabilization is the first step and then it’s about finding a new partner in the medium term,” said Specht, who has an “add” recommendation on Deutsche Telekom shares. “In the long run a standalone strategy seems impossible. Everything from here on is only a second-best solution.”
AT&T and Deutsche Telekom agreed to abandon this year’s biggest transaction, which would have created the largest U.S. mobile-phone operator and dethroned market leader Verizon Wireless. Bonn-based Deutsche Telekom cited unwillingness by the U.S. Justice Department and the Federal Communications Commission to change their “non-supportive stance” even after the companies proposed changes to the size and structure of the March 20 transaction. The Justice Department sued in August to block the deal.
Deutsche Telekom fell 1.5 percent to 8.76 euros at 9:48 a.m. in Frankfurt, valuing Europe’s largest phone company at 37.8 billion euros ($49 billion). Before today, the stock had dropped 7.3 percent since the takeover was announced.
T-Mobile is valued at about $19 billion, Berenberg Bank analyst Paul Marsch wrote in a Dec. 12 note, citing a survey the bank held with about 40 investors “a few weeks back.”
In addition to the $3 billion in cash, T-Mobile will receive a package of wireless frequencies from AT&T in 128 market areas, including Los Angeles, Dallas, Houston, Washington and San Francisco. The separation agreement also includes a roaming deal lasting at least seven years, which Deutsche Telekom said will improve T-Mobile’s coverage to 280 million potential customers from 230 million.
T-Mobile spends about $3 billion annually on capital expenditures, including network upgrades, WestLB’s Specht estimates. Upgrading to the long-term evolution technology being rolled out by its competitors, including new spectrum, may cost $8 billion to $9 billion and such a process may take three years, said Jonathan Atkin, an analyst at RBC Capital Markets.
T-Mobile USA lost 849,000 contract customers in the first nine months of the year. Its operating income before depreciation and amortization was $3.91 billion in that period, compared with $4.14 billion a year earlier.
Deutsche Telekom Chief Executive Officer Rene Obermann had planned to part with T-Mobile USA to focus on restoring growth in Europe amid a debt crisis that has reduced demand for phone services. Before Deutsche Telekom agreed on the deal with AT&T, it had also held talks with Sprint Nextel Corp. (S), people with knowledge of the matter said in March. Sprint remains a potential suitor for T-Mobile in the future, said RBC’s Atkin.
“They’ll need to make the asset as competitive as they can, not only to bring in good results for the operating business, but also in order to fetch a better price at a future date,” he said.
T-Mobile may reduce the costs of an LTE rollout by sharing next-generation wireless infrastructure with AT&T or Sprint, Atkin said. For additional frequencies, T-Mobile may look to Clearwire Corp. (CLWR) or Sprint for more spectrum, or wait for the next round of spectrum auctions in the U.S., which may come in as little as six months, he said.
T-Mobile missed a potential opportunity to purchase additional wireless frequencies this month after Verizon Wireless agreed to buy spectrum valued at $3.6 billion from cable companies Comcast Corp. (CMCSA), Time Warner Cable Inc. (TWC) and closely held Bright House Networks LLC. Phone companies need wireless frequencies to add capacity to meet increasing demand for high-speed mobile Internet devices.
Deutsche Telekom may revisit plans, shelved after the AT&T agreement, to sell its U.S. tower network. Those assets may be worth as much as $3 billion, RBC’s Atkin estimated.
“We think they will go back to the old fashioned sort of plan - run the business,” Sanford C. Bernstein analyst Robin Bienenstock wrote in a note today. “T-Mobile USA will compete for prepay customers and hope that Sprint or someone else comes under enough strain they free up more spectrum.”
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