Sprint, Deutsche Telekom Said to Discuss T-Mobile USA Deal

Deutsche Telekom AG (DTE) has held talks to sell its T-Mobile USA unit to Sprint Nextel Corp. (S) in exchange for a major stake in the combined entity, said people with knowledge of the matter.

Talks have been on and off, and a deal may not be reached, said the people, who spoke on the condition of anonymity because the talks are private. The companies haven’t been able to agree on the valuation of T-Mobile USA, which reported a drop in profit in the fourth quarter, the people said. Sprint and Deutsche Telekom shares jumped.

A merger of Sprint and T-Mobile USA would combine the third- and fourth-largest U.S. wireless providers behind Verizon Wireless and AT&T Inc. (T) T-Mobile USA may be worth $15 billion to $20 billion, according to Michael Kovacocy, an analyst at Evolution Securities in London. Sprint’s market value was $13.6 billion as of yesterday’s close.

Deutsche Telekom may be disappointed in the price an acquirer is willing to offer, Kovacocy said in an interview. Even though the company may expect about $25 billion based on the unit’s earnings, buyers may want to pay less because of the customer losses, he said.

“It’s selling from a weak position in the marketplace,” said Kovacocy, who doesn’t own shares in either company. “The operations could fetch well south of $20 billion, well below what DTE would look for.”

Sprint added 22 cents, or 4.9 percent, to $4.70 in New York Stock Exchange composite trading at 4 p.m. Deutsche Telekom closed 4 percent higher at 10.01 euros in Frankfurt, the biggest increase in almost a year.

Customer Losses

A tie-up would allow Bonn-based Deutsche Telekom, Europe’s largest phone company, to keep a stake in one of its biggest markets while making it easier to finance investments for a faster next-generation network.

“In general, all options are open in the U.S. -- the sale of the whole business or of parts,” Deutsche Telekom Chief Financial Officer Timotheus Hoettges said in an e-mail today. He said the company could also find a partner, sell shares in the market or form a network agreement.

Bill White, a spokesman for Overland Park, Kansas-based Sprint, declined to comment.

Contracts protecting against a Sprint default for five years dropped to the lowest since October, according to data provider CMA. The contracts declined 36.9 basis points to 303.1 basis points. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts decline as investor confidence improves and rise as it deteriorates.

Photographer: Andrew Harrer/Bloomberg

A pedestrian walks past a T-Mobile store in New York. Close

A pedestrian walks past a T-Mobile store in New York.

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Photographer: Andrew Harrer/Bloomberg

A pedestrian walks past a T-Mobile store in New York.

Bonds Rise

The company’s $2.5 billion of 6.875 percent notes due in 2028 rose 4.688 cents to 93.938 cents on the dollar as of 3:52 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

T-Mobile, which accounts for about a quarter of Deutsche Telekom’s sales, has lost customers at an accelerated rate as it trailed rivals in building out a third-generation mobile network and missed out on being able to sell Apple Inc.’s iPhone. About 56,000 customers abandoned T-Mobile USA last year, while Sprint, AT&T and Verizon Wireless all boosted their counts.

Talks have included discussion of Deutsche Telekom owning about 50 percent of a combined T-Mobile USA-Sprint, one person said. Sprint had revenue of about $32.6 billion in 2010, while T-Mobile USA recorded revenue of $21.4 billion.

‘Flexibly Positioned’

T-Mobile USA is also discussing buying wireless spectrum from Clearwire Corp. (CLWR) as an alternative to a merger with Sprint, two people said. Deutsche Telekom’s Hoettges said last month that buying U.S. wireless spectrum from Clearwire is only one option for the German phone company. He ruled out an outright sale of T-Mobile in the U.S.

“We’re flexibly positioned,” Hoettges said today, adding that Deutsche Telekom is working on several options. “We’re not under pressure. We want the best solution.”

Susan Johnston, a Clearwire spokeswoman, didn’t return a call for comment. Sprint is the majority owner of Kirkland, Washington-based Clearwire.

Sprint is also in talks with LightSquared Inc., a wireless startup founded by billionaire Philip Falcone and backed by his Harbinger Capital Partners hedge fund, three people familiar with the talks said last month. LightSquared, which is seeking to sell 4G capacity in the U.S., may strike a deal to use Sprint’s cell sites and equipment to build out its network.

Sprint said in December it is going to spend as much as $5 billion over the coming three to five years to upgrade its network to allow it to combine the disparate spectrum bands it uses onto a single type of base station.

Goldman Sachs Group Inc. is advising Sprint, Morgan Stanley is working with Deutsche Telekom, and Deutsche Bank AG is advising Clearwire, the people said.

To contact the reporters on this story: Serena Saitto in New York at ssaitto@bloomberg.net; Jacqueline Simmons in Paris at jackiem@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; Peter Elstrom at pelstrom@bloomberg.net

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