Deutsche Telekom may be forced into arms of Sprint

By Maria Sheahan, Reuters

FRANKFURT–Deutsche Telekom may be forced into a tie-up of its sub-scale U.S. wireless unit with Sprint Nextel after a US$39 billion deal with AT&T collapsed. AT&T said on Monday it had dropped its bid for T-Mobile USA, bowing to fierce regulatory opposition and leaving both companies scrambling for alternatives. While Deutsche Telekom is now walking away with a US$6 billion breakup package, its chief executive Rene Obermann has lost a lot of time and will now have to invest in the U.S. market or find a new way to exit the country, an option analysts regard as unlikely. T-Mobile USA “is just crying out for a merger with Sprint. That’s the only long-term solution for Deutsche Telekom,” Will Draper, head of telecoms research at Espirito Santo, said. T-Mobile USA, a growth engine in its early days but now a run-down asset, is badly lacking in the spectrum it needs to build a network capable of handling the vast data volumes that U.S. consumers and businesses use on smartphones. Bleeding money and losing customers, it ranks fourth among U.S. carriers behind AT&T, Verizon and Sprint. Obermann offered no detailed plan of how the company will bounce back from the collapse of talks with AT&T, only assuring investors he was working on a long-term plan for T-Mobile USA. “In the long term, we need more spectrum and network capacity. We are working on that. But we will not speculate about any inorganic steps or deals,” he told reporters during a conference call. He also said it was incomprehensible to him that U.S. regulators blocked the transaction. Deutsche Telekom shares closed down 0.4 percent at 8.86 euros, the only decliner in the blue-chip DAX index, on investor concern the company is back at square one with its American problem child. Before talks with AT&T were announced in March, sources said Deutsche Telekom was looking at a potential deal with Sprint. Reportedly, it was considering a sale of T-Mobile USA to Sprint in exchange for a stake in the combined company. But instead of pursuing a tie-up with Sprint, Obermann bet all his chips on a deal with AT&T. “Whilst a merger with Sprint is probably the best long-term strategic option in the United States, there would be pain for Deutsche Telekom in the near term, starting with the need to invest in Sprint/T-Mobile USA,” Espirito Santo said. Deutsche Telekom would likely get a stake in a combined entity in such a deal rather than cash, which would still leave it saddled with a company needing investments. Sprint, which has itself been losing subscribers for years, recently went to debt markets to raise US$4 billion to finance its own debt maturities, a costly network upgrade and hefty expenses from its agreement with Apple Inc to sell the iPhone.

Sprint has said that it still needs to raise up to US$3 billion in vendor financing for its network upgrade. Robert W. Baird analyst Will Power cautioned that it was not clear whether regulators would permit such a deal. Adding to its woes, Deutsche Telekom missed out on spectrum sales in the United States while it was busy negotiating the T-Mobile mega-merger, leaving it even more vulnerable.