T-Mobile USA Defections Distract Obermann’s Turnaround Plan

As Deutsche Telekom AG (DTE) Chief Executive Officer Rene Obermann strives to return the company’s European business to growth, the U.S. wireless unit he agreed to sell to AT&T Inc. (T) for $39 billion is being left behind.

T-Mobile USA’s net loss of contract customers may have reached 350,000 last quarter, UniCredit SpA analyst Thomas Friedrich estimates. That would bring losses since the final quarter of 2010 to more than 1 million, cutting the operator’s contract-user base to 25.6 million. Adjusted earnings before interest, taxes, depreciation and amortization may have dropped 14 percent to $1.4 billion, the average of 10 estimates shows.

The March 20 deal to sell T-Mobile USA faces opposition from some U.S. lawmakers, who say the creation of the largest U.S. wireless operator would increase fees and stifle competition. T-Mobile, already losing customers because it doesn’t carry Apple Inc.’s iPhone, risks further defections after it dropped plans to build a faster network based on technology used by rivals including Verizon Wireless.

“It doesn’t help if you want to focus on Europe and the U.S. market is still there and you can’t get rid of it, and you have to devote management time on it,” said Leon Cappaert, who helps manage 400 million euros ($570 million) at KBC Asset Management in Brussels, including Deutsche Telekom shares.

‘Discontinued’

The stock declined as much as 1.2 percent to 10.23 euros and was 0.1 percent lower as of 10:08 a.m. in Frankfurt. Before today, it had gained about 7 percent this year, the fifth-best performance on the 21-company Bloomberg Europe Telecommunication Services Index, which dropped 6.2 percent. Dallas-based AT&T fell 34 cents, or 1.2 percent, to $29.18 in New York yesterday and is little changed this year.

Since the first quarter, Deutsche Telekom has separated T- Mobile USA as “discontinued operations” in its earnings reports. The Bellevue, Washington-based unit accounted for 26 percent of Deutsche Telekom’s revenue in 2010. Europe’s largest phone company may tomorrow say Ebitda adjusted for some items fell 3 percent to 3.78 billion euros in the second quarter as revenue slid in countries such as Romania and Croatia, according to the median of 17 analyst estimates compiled by Bloomberg.

Some board members are of the view that Obermann, 48, should do more to ensure the U.S. business remains competitive given the risks around the lengthy regulatory review of the deal, according to two people familiar the matter, who asked not to be identified because the discussions aren’t public.

Stopped the Clock

Philipp Kornstaedt, a Deutsche Telekom spokesman, declined to comment on U.S. customers and earnings. The company is scheduled to hold a press conference tomorrow at its headquarters in Bonn at 10 a.m. to discuss quarterly results.

The Federal Communications Commission, which is reviewing the deal along with the U.S. Justice Department, on July 20 stopped the clock on its 180-day informal timeline for its analysis to evaluate new economic models presented by AT&T.

Senators including Democrat Al Franken and Herb Kohl have spoken out against the deal, and California has opened its own inquiry into the transaction.

In a letter to regulators yesterday, Lamar Smith, the chairman of the U.S. House of Representatives Judiciary Committee, said the transaction has benefits and there’s “at least as much evidence” in support of the deal as against it.

As recently as the May 12 shareholder meeting, Obermann said he was “confident” that the sale would be completed in the first half of 2012.

‘Structural Problem’

There’s a 70 percent to 80 percent probability that the deal will eventually win approval, Saeed Baradar, a telecommunications sales specialist at Societe Generale in London, wrote in a note yesterday. Closing the sale of this “structural problem” may send Deutsche Telekom’s shares as much as 15 percent higher, he estimated.

Should regulators reject the transaction, AT&T would pay Deutsche Telekom $3 billion in cash. It would also provide T- Mobile USA with wireless spectrum in some regions and reduced charges for calls into AT&T’s network, for a total package valued at as much as $7 billion, according to Kornstaedt.

Still, with customers already wary of signing contracts amid unclear ownership of the brand, T-Mobile USA isn’t doing enough to retain them with popular devices and new marketing initiatives, said Courtney Munroe, an analyst at Framingham, Massachusetts-based IDC.

Market Share Loss

T-Mobile “is not as edgy as they used to be,” he said. “AT&T has been very aggressive. Verizon has done surprisingly well. Sprint arrested its downward spiral. They’ve gotten good devices. The competition has gotten very stiff.”

Verizon, AT&T and Sprint Nextel Corp. (S) all increased their share of the U.S. wireless subscription market in the second quarter, according to data from IDC, which doesn’t have an estimate for second-quarter figures for T-Mobile. In the first quarter, T-Mobile’s share shrank 0.4 percentage point to 10 percent, the researcher said.

The median estimate for T-Mobile USA's contract-customer losses in the second quarter was 200,000, according a Bloomberg survey among eight analysts.

Last week, RadioShack Corp. said it will no longer carry T- Mobile USA products from Sept. 15 and will instead sell Verizon Wireless offerings. While that will cut by half T-Mobile’s U.S. sales points from about 8,500, new deals will return the number of outlets to at least to the previous level, Kornstaedt said. Yesterday, T-Mobile USA said it started distributing prepaid handsets at 7-Eleven Inc. stores nationwide.

‘Draw a Line’

T-Mobile USA’s outlays on infrastructure probably declined because of the merger limbo, says Matt Thornton, an analyst at Avian Securities LLC. First-quarter cash capital expenditure was $749 million, compared with $828 million in the fourth quarter of 2010 on lower network spending.

At home, Obermann has vowed to return the European division excluding Germany to growth by 2013. He needs to win back customers from Greece to Hungary and cut expenses amid the European sovereign-debt crisis.

“Deutsche Telekom has drawn a line under this one,” Dirk Springer, who manages 1.6 billion euros at Joh. Berenberg Gossler & Co. in Hamburg including Deutsche Telekom shares, said of T-Mobile USA. The U.S. “is going to remain really tough, and it’s important that the approval process goes smoothly because the management has so many other battlegrounds to fight on.”

To contact the reporters on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net; Olga Kharif in Portland, Oregon, at okharif@bloomberg.net

To contact the editors responsible for this story: Kenneth Wong in Berlin at kwong11@bloomberg.net; Peter Elstrom at pelstrom@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.