Managers led by Chief Executive Officer Rene Obermann were meeting with Deutsche Telekom’s supervisory board yesterday when they heard the U.S. Justice Department sued to block the deal, Niek Jan van Damme said in Berlin. Obermann, who had previously demonstrated confidence that the transaction would be approved, was taken by surprise, said a person familiar with the matter, asking not to be identified because the meeting was private.
Deutsche Telekom shares slumped 7.6 percent in Frankfurt trading yesterday, erasing 3.1 billion euros ($4.5 billion) in market value. The Bonn-based company said it will join AT&T in contesting the Justice Department’s complaint in court. The transaction is the biggest for Obermann, 48, since he became CEO at Europe’s largest telephone company in 2006.
“Other scenarios were not being discussed,” Van Damme, who heads Deutsche Telekom’s German business, told reporters on the sidelines of the IFA electronics fair in Berlin. “When you are in a deal, you stick to that deal, a clear focus on that deal.”
Asked whether Deutsche Telekom is considering other scenarios, he said: “We’re staying with it, this isn’t over.”
The company doesn’t depend on the cash from the deal to pursue its investment plans in other markets, he said, adding that “of course extra funds would be good.”
Analysts at Commerzbank AG, Sanford C. Bernstein & Co. and Berenberg Bank lowered their ratings on Deutsche Telekom stock. In a research note, Bernstein analyst Robin Bienenstock said the deal and any other possible consolidation among the top four U.S. mobile-phone operators are “all but dead.”
In its complaint filed yesterday in federal court in Washington, the Justice Department is seeking a declaration that Dallas-based AT&T’s takeover of T-Mobile USA would violate U.S. antitrust law. The U.S. also asked for a court order blocking implementation of the deal.
“When it comes to larger M&A deals in the US, these things happen,” van Damme said. “This isn’t an exception,” he said, adding that “we have everything under control.”
Rejection by regulators would leave AT&T liable to pay Deutsche Telekom $3 billion in cash, to give T-Mobile USA wireless spectrum and to reduce charges for calls into AT&T’s network. Deutsche Telekom values that entire breakup package at as much as $7 billion, Philipp Kornstaedt, a spokesman for the German company, said last month.
“If the deal is facing such an obstacle then it’s negative for Deutsche Telekom as the company wanted to divest the U.S. to support its dividend policy and help reduce debt,” said Thilo Mueller, who helps manage 120 million euros at MB Fund Advisory in Limburg, Germany and holds some Deutsche Telekom shares.
Deutsche Telekom last year pledged a minimum dividend of 70 cents per share as well as share buybacks totaling as much as 1.2 billion euros from 2010 through 2012. In addition, it plans to use about 5 billion euros from the T-Mobile USA transaction for additional share buybacks and 13 billion euros from the deal to cut debt, which stood at 43.3 billion euros at the end of the second quarter.
“DOJ failed to acknowledge the robust competition in the U.S. wireless telecommunications industry and the tremendous efficiencies associated with the proposed transaction, which would lead to significant customer, shareholder, and public benefits,” Deutsche Telekom said an in e-mailed statement.
Deutsche Telekom climbed as much as 2 percent today and was up 1.7 percent at 8.95 euros as of 11:56 a.m. in Frankfurt.
“The break-up clause is attractive enough for Deutsche Telekom, to that end there’s a dowry and a degree to which they would be able to save money through any incremental investment that would need to be undertaken in operating as an independent entity in the U.S,” said Morten Singleton, an analyst at Investec Securities in London.
While Deutsche Telekom said it will get cash, airwaves and a roaming agreement if the deal unravels, it may be forced to offer T-Mobile USA to another bidder for $12 billion less than its current agreement.
At the same multiple as the AT&T deal, T-Mobile USA would be worth just $27 billion, based on $935 million in net income in the past 12 months, data compiled by Bloomberg show.
The companies can still salvage the deal if enough concessions are made to satisfy the U.S. government, according to Jan Goehmann, an analyst at Norddeutsche Landesbank Girozentrale in Hannover, Germany.
AT&T has already pledged to bring 5,000 call-center jobs back to the U.S. from other countries once the merger closes and wouldn’t cut any U.S. wireless call-center jobs.
“It’s definitely still possible that the deal will go through with some conditions,” said Goehmann.