Deutsche Telekom, whose proposed $39 billion sale of T-Mobile USA to AT&T Inc. collapsed Monday, 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 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. “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 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.
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.”
To generate cash, Deutsche Telekom may reconsider plans to sell its tower network in the U.S., chief financial officer Timotheus Hoettges said on a conference call this week. A sale of those assets, which was considered until the AT&T agreement, may bring as much as $3 billion, said Jonathan Atkin, an analyst at RBC Capital Markets.
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.
The entire package is worth about $6 billion, CEO Rene Obermann said this week, citing unnamed experts.
T-Mobile USA spent about $3 billion annually on capital expenditures in recent years, including network upgrades, Obermann said, declining to forecast future costs. Upgrading to the faster 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, RBC analyst Atkin said.
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.
Before Deutsche Telekom agreed on the deal with AT&T, it had also held talks with Sprint Nextel, 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.