Deutsche Telekom AG and AT&T Inc. have vowed to fight together in court to rescue a $39 billion sale of T-Mobile USA Inc. That display of unity masks their divergent interests should those efforts fail.
AT&T would gain from drawing out the regulatory review to keep ownership of its smaller rival uncertain while putting off the payment of a breakup fee estimated at as much as $7 billion, investors said. T-Mobile owner Deutsche Telekom is better off having its hands free as soon as possible to explore options after a U.S. Justice Department lawsuit to halt the deal sliced 14 percent off its stock in just over a week, they said.
“AT&T still wants the deal to go through, but if there’s no hope for it, then it’s to their benefit to prolong the process,” said Leon Cappaert, a fund manager at Brussels-based KBC Asset Management who holds AT&T and Deutsche Telekom shares. “For Deutsche Telekom, it’s just the other way round. This is a window of opportunity for all players to grab customers from T-Mobile.”
Deutsche Telekom Chief Executive Officer Rene Obermann, 48, had turned the U.S. business into the German company’s fastest-growing unit in his previous role as head of T-Mobile International. T-Mobile USA has lost almost 1 million contract customers in the past four quarters, as consumers demanding attractive Web-surfing, multimedia phones switched to rivals. It has also suffered from lagging behind competitors in building faster networks.
Obermann still has the full support of Deutsche Telekom’s board to salvage the AT&T transaction, people with knowledge of the matter said, asking not to be identified as revealing internal deliberations.
While Deutsche Telekom remains focused on addressing regulatory concerns, management is starting to consider options should the deal collapse, the people said. They include spinning off T-Mobile USA to shareholders and reviving talks with previous suitors, they said. Deutsche Telekom had considered an IPO of T-Mobile USA as recently as last year.
Philipp Kornstaedt, a Deutsche Telekom spokesman, reiterated that the company is committed to joining AT&T in court to defend the transaction. The German company said this week it would also explore options for the U.S. assets together with AT&T to address potential remedies required by regulators.
Brad Burns, a spokesman for Dallas-based AT&T, declined to comment.
Deutsche Telekom dropped as much as 34 cents, or 4 percent, to 8.14 euros and was down 3.6 percent as of 3:45 p.m. in Frankfurt. The stock has lost 14 percent since the Aug. 31 U.S. lawsuit against the transaction, which would create the largest mobile-service provider in the country, ahead of Verizon Wireless.
HSBC Holdings Plc analysts cut Deutsche Telekom’s rating to “neutral” from “overweight,” lowering their share-price estimate by 32 percent to 9.50 euros, citing the risk of a “prolonged deadlock” over T-Mobile USA and “less flexibility and delays” in rolling out a next-generation network in Germany.
The T-Mobile USA deal now has a 75 percent risk of failing, up from 50 percent, Espirito Santo analysts led by Will Draper wrote in a note.
AT&T slipped 18 cents, or 0.6 percent, to $27.78 in New York trading.
Germany’s former phone monopoly can’t yet restart talks with other suitors while it’s contractually obligated to fully back the deal, said Heinrich Ey, a fund manager at Allianz Global Investors in Frankfurt who holds AT&T and Deutsche Telekom shares.
“With AT&T in the driver’s seat, Deutsche Telekom has to do everything to support them,” Ey said. With the probability of regulatory approval now “very low,” a sale of the entire business would still be the best option for investors, he said.
An IPO of T-Mobile may only yield about 20 billion euros ($28 billion), according to Ey’s estimates.
Deutsche Telekom had held negotiations with five companies about the future of T-Mobile USA, Chief Financial Officer Timotheus Hoettges said March 21, a day after the transaction was announced, without identifying the companies. Sprint Nextel Corp. was one of them, people with knowledge of the matter have said.
AT&T and the Justice Department are scheduled to meet in court Sept. 21 to explore whether a settlement may be reached. The parties were asked to submit a joint proposal by Sept. 16 for scheduling the litigation. The U.S. Federal Communications Commission is also reviewing the deal.
Deutsche Telekom expects proceedings won’t start before next year, Kornstaedt said. Sprint, which would become the smallest national wireless carrier if the deal goes through, this week stepped up its opposition by bringing a separate antitrust lawsuit.
Any changes to the key points of the purchase agreement that are brought on by regulatory requirements would need approval by Deutsche Telekom’s supervisory board, one of the people said.
A successful divestment to AT&T remains the preferred outcome for both Obermann and Deutsche Telekom investors. The company has pledged funds from the sale to cut debt and repurchase shares, as well as boosting its European operations and expanding its broadband network. Deutsche Telekom would also gain a stake in AT&T of as much as 8 percent, from which the German company hopes to draw about $600 million in annual dividend payments.
“This uncertainty will be most damaging to T-Mobile and Deutsche Telekom, which we presume will not be able to exercise the deal’s break-up provisions and may be precluded from seeking alternative options,” said John Jackson, a Boston-based analyst at CCS Insight. “A blocked deal would leave T-Mobile a weak fourth-place national operator with a parent highly unlikely to commit additional investment and an unappealing shortlist of alternative suitors.”