Deutsche Telekom AG’s chief executive officer said he doubts a merger of its T-Mobile US Inc. with Sprint Corp. could win regulatory approval anytime soon, pouring cold water on SoftBank Corp.’s ambitions to add to its holdings.
“We’re getting signals from the regulatory authority as well as antitrust supervisors that such a merger isn’t seen as expedient,” Timotheus Hoettges said on a conference call while presenting first-quarter earnings today. “Against that backdrop, we have to see how we can develop the business so it creates the most value for our shareholders.”
T-Mobile is boosting sales at the expense of earnings as Hoettges aims to build it into a more serious challenger to larger rivals AT&T Inc. and Verizon Communications Inc. Sprint, the wireless provider controlled by Masayoshi Son’s SoftBank and the No. 3 operator in the U.S., plans to push forward with a bid for T-Mobile after meeting with banks to secure financing for an offer, people with knowledge of the situation said last week.
While T-Mobile added 2.4 million customers in the first quarter, more than AT&T and Verizon combined, Hoettges reiterated that a merger of the smaller wireless operators would make sense as unavoidable investments in spectrum and network upgrades would put them at a disadvantage to larger peers in the longer run.
The U.S. Department of Justice and the Federal Communications Commission blocked AT&T’s effort to acquire T-Mobile in 2011. AT&T Chief Financial Officer John Stephens echoed Hoettges’s sentiment today, saying he would be surprised if consolidation were allowed now. Matthew Nicholson, a spokesman for SoftBank, declined to comment.
Sales growth at T-Mobile may slow to 8 percent in the third quarter from 13 percent in the second, analysts estimate. Deutsche Telekom CFO Thomas Dannenfeldt said today that U.S. expansion may slow as the company tries to balance growth with profitability.
“If T-Mobile is going to be a viable business, they’ll need to keep investing to gain scale,” said Andrew Hogley, an analyst at Espirito Santo Investment Bank in London. “The question is: How long are they willing to sustain the drain on cash flow that entails?”
T-Mobile’s growth spree came at a steep price, as it spent on upgrading airwaves and luring clients with discount offers. While revenue for T-Mobile and its acquisition MetroPCS Communications combined grew 15 percent over the past four quarters, adjusted Ebitda fell 26 percent, or $381 million.
Deutsche Telekom shares fell 0.6 percent to 12.39 euros at 3:33 p.m. in Frankfurt. The stock is down 0.4 percent this year. T-Mobile was 0.5 percent higher in New York at $31.85, while Sprint added 0.2 percent to $8.75 at 10:03 a.m.
Chances of a combination with Sprint being approved by regulators may be 40 percent “at best,” Berenberg Bank analyst Paul Marsch said in a note today, citing discussion with antitrust lawyers.
Sprint wants to pursue a deal while regulators are also reviewing Comcast Corp.’s acquisition of Time Warner Cable Inc., with the hope that regulators will see both deals as changing the telecommunications industry, people familiar with the matter have said.
Hoettges also said today that the company is open to selling T-Mobile shares on the market once a lock-up period expires in November. An exit from the U.S. would allow Bonn-based Deutsche Telekom to once again focus on its more profitable European operations.
The operator said today Ebitda in the three months through March dropped 3.9 percent to 4.12 billion euros ($5.7 billion) leaving out interest, taxes, depreciation and amortization and excluding some items. Analysts on average predicted 4.15 billion euros, according to data compiled by Bloomberg. Sales rose 8 percent to 14.9 billion euros, matching the average estimate.
Sales in Europe, including Deutsche Telekom’s German home market, shrank in the period. Still, earnings remained close to the year-earlier period, and much higher than in the U.S., after the company scaled back ambitions in content and media and focused on network investments to win Internet and phone users.
The European Commission is due to decide by next month whether an agreed merger of smaller rivals Telefonica Deutschland Holding AG and Royal KPN NV’s E-Plus, which would reduce the number of national network owners to three from four, can go ahead. An approval is widely seen as a trigger for more consolidation in Europe, where Deutsche Telekom makes more than 60 percent of its revenue.
The carrier is working to fix its languishing core unit. It gained ground on wireless rivals in Germany, lifting mobile-service revenues by 0.2 percent while the market probably shrank about 2 percent in the quarter, spokesman Andreas Leigers said in a conference call. It also added a record number of customers for its fixed-line Internet services using fiber and the high-speed VDSL technology.
First-quarter net income was 1.82 billion euros, compared with 564 million euros a year earlier, boosted by the sale of a 70 percent stake in the Scout24 Holding GmbH Web portal. Deutsche Telekom confirmed its full-year earnings and cash-flow forecasts.
During the quarter, Deutsche Telekom agreed to acquire full ownership of its Czech unit for about $1.1 billion. The biggest investor in eastern European telecommunications is also considering a bid for Slovenia’s Telekom Slovenije d.d. and has offered to acquire the remaining 10 percent holding in Hellenic Telecommunications Organization SA held by the Greek government, people familiar with the matter have said.