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Deutsche Telekom Losing $28 Billion Bet With T-Mobile: Real M&A

Deutsche Telekom Losing $28 Billion Bet With T-Mobile
The T-Mobile company logo sits outside a store in London. Photographer: Simon Dawson/Bloomberg

A decade after staking $28.5 billion to gain a foothold in the U.S. mobile-phone market, Deutsche Telekom AG is now mulling a sale of T-Mobile USA that may value its original investment at less than 60 cents on the dollar.

Deutsche Telekom, Europe’s biggest phone company, has held talks to sell its U.S. wireless unit to Sprint Nextel Corp., people with knowledge of the matter said. Based on the median value of 12.4 times earnings for mobile-phone companies around the world, T-Mobile USA would have a market capitalization of $16.8 billion, according to data compiled by Bloomberg. That’s 41 percent less than it spent to acquire VoiceStream Wireless Corp. and Powertel Inc. in May 2001.

Deutsche Telekom, which has lost 59 percent of its value since closing the deals to create T-Mobile USA, is now looking for buyers for a company that reported profit declines in four of the past five years and lost subscribers to its competitors. A tie-up with Sprint, which analysts estimate will lose money for a fifth consecutive year in 2011, will join two incompatible wireless networks that would still have fewer mobile-phone customers than Verizon Communications Inc. or AT&T Inc.

T-Mobile USA was “not a good investment,” said Peter Sorrentino, who helps oversee $14.4 billion at Huntington Asset Advisors in Cincinnati. “Deutsche Telekom had been a tepid player at best and their dedication to the market was never all that strong.”

Combining T-Mobile and Sprint “would require one or the other to completely re-equip their subscriber base,” he said. “The two are not compatible.”

Combined Entity

Deutsche Telekom of Bonn would get a major stake in the combined entity, said the people, who declined to be identified 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.

“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 yesterday. He said the company could also find a partner, sell shares in the market or form a network agreement.

Scott Sloat, a spokesman for Sprint, declined to comment.

Morgan Stanley of New York is advising Deutsche Telekom and New York-based Goldman Sachs Group Inc. is working with Sprint, the people familiar said.

Shares of Deutsche Telekom and Overland Park, Kansas-based Sprint advanced on the report yesterday, leaving them with market values of 43.3 billion euros ($60.1 billion) and $14.2 billion, respectively, data compiled by Bloomberg show.

‘Horrendously Complicated’

“Putting the two businesses together, while it would be an absolutely horrendously complicated event, they do solve each other’s problems,” said Robin Bienenstock, a London-based analyst at Sanford C. Bernstein & Co. who has an “outperform” rating on Deutsche Telekom. “And you take capacity out of the market, which is always good for pricing.”

T-Mobile USA’s net income fell 7.9 percent to $1.35 billion last year, data compiled by Bloomberg show. Using the median price-earnings ratio of 12.4 for 38 mobile-phone companies globally with more than $1 billion in market value would give T-Mobile USA a capitalization of $16.8 billion, the data show.

AT&T of Dallas, the second-largest U.S. wireless carrier, is valued at 13.1 times reported earnings.

T-Mobile USA’s three main U.S. competitors also have an average enterprise value, or equity and net debt, of 5.8 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. By that measure, T-Mobile USA would be worth $15.9 billion excluding net debt, based on its reported Ebitda of $5.48 billion last year.

VoiceStream, Powertel

Michael Nelson, a telecommunications analyst at Mizuho Securities USA Inc. in New York, values the company at about $14 billion, assuming Deutsche Telekom keeps a majority stake. Michael Kovacocy, an analyst at Evolution Securities in London, estimates T-Mobile USA may be worth $15 billion to $20 billion.

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 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.

Deutsche Telekom initially agreed to pay $50.7 billion, excluding assumed debt, when it announced the VoiceStream deal in July 2000, just as the technology bubble started to burst. It lowered the offer after both companies’ shares declined.

Deutsche Telekom Stakes

The shares VoiceStream and Powertel holders received from Deutsche Telekom were valued at about 28.7 billion euros when the transactions closed, data compiled by Bloomberg show. With Deutsche Telekom’s shares ending yesterday at 10.01 euros a share, those stakes are worth about 17 billion euros less.

Sprint, which acquired Nextel Communications Inc. in August 2005 for $45.9 billion including assumed debt, has lost money every year except one since the takeover, data compiled by Bloomberg show. Customers abandoned the third-largest U.S. mobile phone carrier after complaints about call quality as Sprint struggled to integrate the Nextel network into its operations. The company wrote down most of the acquisition.

“Sprint didn’t do too well with its last merger,” said Joseph Bonner, an equity analyst at Argus Research in New York. “Now they want to add another incompatible network. That’d be very interesting.”

Relative Performance

Shares of Sprint, which analysts project will not post a profit until 2014, have retreated 80 percent since the Nextel deal was completed in August 2005. The Standard & Poor’s 500 Telecommunication Services Index has climbed 33 percent, including dividends, in the same period. AT&T, which started selling the iPhone in 2007, has returned 55 percent since the Sprint-Nextel merger, while New York-based Verizon Communications gained 65 percent, including payouts.

“Most M&A pros do not care about past deals and are always touting synergies, cost savings, and scale,” said Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees about $3.2 billion. “M&A activity is about putting a buyer and a seller together. Whether it is a good investment is a secondary, if at all, concern.”

Elsewhere in mergers and acquisitions, Johannesburg-based Sasol Ltd., the largest producer of motor fuels made from coal and gas, said in a statement yesterday it had agreed to pay Talisman Energy Inc. of Calgary C$1.05 billion ($1.08 billion) for a stake in the Cypress A project in Canada.

Daimler AG and Rolls-Royce Group Plc made a takeover bid for Tognum AG valuing the German manufacturer at 3.2 billion euros as they target growing demand for heavy engines in emerging economies.

There have been 4,253 deals announced globally this year, totaling $417.3 billion, a 14 percent increase from the $365.8 billion in the same period in 2010, according to data compiled by Bloomberg.

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