Deutsche Telekom Surges on $39 Billion U.S. Sale to AT&T

Deutsche Telekom AG (DTE) shares surged the most since 2008 after the company agreed to sell its U.S. wireless unit to AT&T Inc. (T) for $39 billion, a price that exceeded analyst expectations and allows it to slash debt.

“T-Mobile USA’s standing within the Deutsche Telekom business had veered dramatically in recent years from the star performer to an isolated and increasingly problematic black sheep,” said Thomas Wehmeier, principal analyst at Informa Telecoms & Media. “The sale of the unit helps Deutsche Telekom to recoup the value sunk into the business.”

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.

Chief Executive Officer Rene Obermann had been considering options for the business, including a possible deal with Sprint Nextel Corp., as the unit struggled to compete with larger rivals. The company held negotiations with five different companies about the future of T-Mobile USA, Chief Financial Officer Timotheus Hoettges said on a conference call today.

Deutsche Telekom shares rose 11 percent to 10.67 euros in Frankfurt trading. AT&T climbed 1.4 percent to $28.32 at 1:14 p.m. in New York Stock Exchange composite trading.

‘Great Price’

The German company managed to negotiate a “great price,” said Saeed Baradar, a telecommunications sales specialist at Societe Generale in London. The deal values the business at seven times earnings before interest, taxes, depreciation and amortization, compared with an industry average of 5.5 times in Europe, he said.

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.

Excluding the U.S., almost 80 percent of the Bonn-based company’s revenue comes from Europe, and investors say Deutsche Telekom should use some of the proceeds to expand in emerging markets.

‘Leftover Money’

“First they will reduce debt, and do share buybacks, and they will have some leftover money,” Ulf Moritzen, who helps manage about 1.1 billion euros at Aramea Asset Management in Hamburg, including Deutsche Telekom shares, said in an interview. “I hope they use the money to find other emerging markets.”

Photographer: Hannelore Foerster/Bloomberg

The Deutsche Telekom AG company headquarters stand in Bonn. Close

The Deutsche Telekom AG company headquarters stand in Bonn.

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Photographer: Hannelore Foerster/Bloomberg

The Deutsche Telekom AG company headquarters stand in Bonn.

Deutsche Telekom’s acquisition strategy won’t change and the company will remain “very restrictive with regards to large acquisitions,” CFOHoettges said today. He said the company doesn’t have Africa or Asia on its “radar for acquisitions.”

Instead, the company will invest in wireless Internet, home networks and cloud-computing services, he said. “And the deal will improve all key indicators, such as earnings per share, cash flow per share, margin, debt ratio,” the CFO said. “Our debt obligations will be 30 percent lower after this transaction.”

Deutsche Telekom had net debt of 42.3 billion euros at the end of 2010.

Dividend Policy

Deutsche Telekom said it won’t change its dividend policy and still aims to pay out 3.4 billion euros in the years 2010 to 2012.

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.

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.

AT&T Stake

“Removing T-Mobile USA will take away some of the growth potential,” said Mark Newman, chief research officer of Informa Telecoms & Media. 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 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 CEO Obermann will join Dallas-based AT&T’s board of directors.

Deutsche Telekom expects to get about $600 million in dividend payments a year for its stake in AT&T.

“We’ll continue to benefit from the growth in the U.S. market,” CFO Hoettges said today.

Deutsche Telekom also said that is not in talks anymore to sell U.S. wireless towers as they are part of T-Mobile USA. On Feb. 25, the company said it planned to approach the market for buyers of these towers in the second quarter, and a sale could fetch “low single-digit billion” U.S. dollars.

‘Less Risk’

Credit Suisse analysts say the AT&T deal is 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 and the companies hadn’t been able to agree on the valuation of the business, people with knowledge of the matter said earlier this month.

“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.

The yield premium on Deutsche Telekom’s 500 million euros of 4.5 percent notes due 2030 narrowed 5 basis points to 168 basis points, according to pricing data compiled by Bloomberg. That’s the tightest spread since March 4, the data show.

Spreads on AT&T’s 1.1 billion pounds of 7 percent notes due 2040 were unchanged at 122 basis points, Bloomberg data show. Its 1.25 billion euros of 6.125 percent debt maturing in 2015 were also little changed at 120 basis points, the data show.

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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