Deutsche Telekom Ends Decade-Long U.S. Foray With Sale to AT&T

Two months ago, Deutsche Telekom AG (DTE)’s head of the U.S. told investors in New York that its wireless unit there was “ready to turn the business around” with the “best” fast Internet network to win back customers. Yesterday, it decided to sell instead.

The sale of T-Mobile USA, which generates about a quarter of the German company’s sales, to AT&T Inc. (T) in a deal valued at about $39 billion, deals a blow to the expansion plans of Deutsche Telekom Chief Executive Officer Rene Obermann. Excluding the U.S., almost 80 percent of the Bonn-based company’s revenue comes from Europe.

“Without the USA, Deutsche Telekom is looking like a slightly narrow-focused European player,” Mark Newman, chief research officer of Informa Telecoms & Media, said in an interview. “The key question is if Deutsche Telekom is going to be looking for acquisitions in other parts of the world, in which case where? There are no cheap acquisitions anymore.”

Deutsche Telekom said late yesterday it will use the proceeds to slash debt by about 13 billion euros ($18.4 billion), expand in Europe and invest in its local broadband business. The company, which retains T-Mobile USA’s almost $16 billion in debt as part of the AT&T deal, will funnel about 5 billion euros into share buybacks.

The sale gives the company a “strengthened balance sheet that we can put towards our strategy and investing in growth fields like intelligent networks, smart grids, Internet solutions for the health and automotive sector,” Deutsche Telekom spokesman Stephan Broszio said by phone.

VoiceStream Purchase

Deutsche Telekom, which entered the U.S. a decade ago under then-CEO Ron Sommer by staking $28.5 billion on VoiceStream and Powertel, was considering options for T-Mobile USA after the unit reported profit declines in four of the past five years. Europe’s biggest phone company trailed rivals in the U.S. in building out a third-generation mobile network and missed out on being able to sell Apple Inc. (AAPL)’s iPhone.

Even after those setbacks, Obermann earlier this year explained the benefits of having a U.S. division by pointing out that “in the U.S. we have $50 of revenues per user per month. That compares to $30 in Western Europe.”

In January, the company still talked about winning U.S. clients back.

Philipp Humm, the unit’s chief executive, said in a presentation to investors in New York that the unit’s sales will be increased by offering customers the “best” data plan and the “best” fourth-generation network.

Losing Share

The decision to exit the U.S. shows that Deutsche Telekom wasn’t able or willing to put in the investment necessary to build a faster network and catch up, analysts said.

Deutsche Telekom’s position in the U.S. is “completely unsustainable as they’re losing clients and market share and need to invest about $10 billion for a fast new network,” Espirito Santo analyst Will Draper said earlier this month.

T-Mobile USA’s net income fell 7.9 percent to $1.35 billion last year, data compiled by Bloomberg show.

The unit saw annual customer growth slow to 10 percent from more than 40 percent between 2002 and 2008. In 2010, it had a 0.2 percent net customer loss and the share of high-margin customers slipped to 78 percent from 89 percent in 2003. About 56,000 customers abandoned T-Mobile USA last year, while Sprint, AT&T and Verizon Wireless all boosted their counts.

Deutsche Telekom had said it aimed to add $3 billion to sales by 2014 in the U.S. and was considering partnerships to buy wireless spectrum for the next generation network.

AT&T Stake

“Removing T-Mobile USA will take away some of the growth potential,” Informa’s Newman said. The company doesn’t have the same mix of operations in mature and emerging markets as European rivals France Telecom SA (FTE), Vodafone Group Plc and Telefonica SA, he said. The German company’s eastern European operations don’t have the same growth potential compared with other emerging markets, according to Newman.

Deutsche Telekom shares have fallen 61 percent since the Voicestream purchase was completed on May 31, 2001. Vodafone dropped 18 percent in that period, Telefonica rose 8.8 percent and France Telecom slumped 73 percent.

The future U.S. business of Deutsche Telekom will consist of a stake of up to 8 percent in AT&T, which will create America’s largest mobile-phone company with the T-Mobile USA deal. Deutsche Telekom will also add an executive to the Dallas- based company’s board of directors.

Some analysts say that the AT&T transaction makes sense as it hands the company a chunk of cash for a struggling business and allows Deutsche Telekom to benefit from the growth in the U.S. at least to some extent.

“Strategically it is a good deal for Deutsche Telekom as T-Mobile USA was struggling as an independent company,” Ameet Shah, a partner at PRTM in London, said in an interview. “They were able to crystallize value, while keeping exposure to the U.S. market with the stock portion.”

Better Than Sprint?

Credit Suisse analysts say the AT&T deal is also preferable to a tie-up with Sprint Nextel Corp. (S), the U.S.’s third-biggest operator. Deutsche Telekom held talks about selling T-Mobile USA to Sprint in exchange for a stake in the combined entity, people with knowledge of the matter said earlier this month. The companies hadn’t been able to agree on the valuation of T-Mobile USA, the people said.

“T-Mobile USA was probably worth $25 billion on a standalone basis,” Credit Suisse analysts Jonathan Chaplin, Tom Champion and Nick Karzon said. “This gets Deutsche Telekom $15 billion in value in a deal that carries substantially less risk than a Sprint deal.”

Deutsche Telekom started T-Mobile USA after buying VoiceStream and Powertel. Deutsche Telekom issued 1.02 billion shares and paid $4.23 billion in cash to VoiceStream’s owners, while Powertel holders got 148 million Deutsche Telekom shares, according to data compiled by Bloomberg and T-Mobile USA.

Regulatory Scrutiny

The deals were completed on May 31, 2001, when Deutsche Telekom closed at 24.60 euros a share. That put the price tag for the two companies at $28.5 billion, data compiled by Bloomberg show.

The acquisition of T-Mobile USA would allow AT&T, now the second-largest U.S. wireless operator, to add 34 million customers and surpass Verizon Wireless as the largest in the country. The deal, the largest in the wireless industry since 2004, may face regulatory scrutiny because it combines the second- and fourth-largest wireless providers.

The agreement has been approved by the boards of directors of both companies, Deutsche Telekom said in a statement.

It’s the largest takeover to be announced in the wireless industry worldwide since 2004, when Sprint agreed to merge with Nextel Communications Inc., and the sixth-largest mobile-phone deal of all time.

To contact the reporter on this story: Ragnhild Kjetland in Frankfurt at rkjetland@bloomberg.net

To contact the editor responsible for this story: Simon Thiel in London at sthiel1@bloomberg.net

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