Deutsche Telekom may sell T-Mobile USA

Deutsche Telekom may sell T-Mobile USAwashingtonpost.com
Deutsche Telekom may sell T-Mobile USA

By Boris Groendahl
Reuters
Monday, July 4, 2005; 7:49 AM

FRANKFURT (Reuters) - Deutsche Telekom has been sounding out institutional investors on whether to sell off U.S. mobile operator T-Mobile USA or spend billions of dollars to expand the business, according to fund managers.

Deutsche Telekom and T-Mobile USA officials declined to comment on what they called market rumors.

In a series of one-on-ones meetings with major investment funds, Chief Financial Officer Karl-Gerhard Eick and other executives of Europe's biggest phone carrier told fund managers a decision would be made by the end of the year.

But many investors are skeptical a buyer will emerge and question whether there was a sensible way to spend the $30 billion Deutsche Telekom could raise in a sale, and hope T-Mobile USA might need less investment if it goes on its own.

"There were several meetings with Eick in which they were testing what our reaction would be," said one fund manager at a major German fund who spoke on the condition of anonymity. The meetings happened around March, he said.

A fund manager at another major German fund, who also declined to be named, confirmed that options for the U.S. mobile business were discussed earlier this year.

"They said there would be a period of uncertainty (until the end of the year), and that we would have to trust them to make the right decision," the second investor added.

One option that Eick presented to investors was to sell the fast-growing business, bought for $40 billion during the peak of the telecoms bubble, while it was still on a good run, signing up subscribers fast, and boosting sales and earnings.

The second scenario was to buy permits for third-generation (3G) mobile phone services in auctions next year and build a 3G network for such services as streaming music and video calls. Analysts reckoned costs of up to $10 billion.

Possible buyers would be Britain's Vodafone Group , the world's biggest mobile carrier, or cable operators seeking an entry into the mobile phone market, the investors said.

"Eick was saying half jokingly how he could always call (Vodafone Chief Executive) Arun Sarin if he wanted to sell," one fund manager said.

But Vodafone, whose U.S. mobile arm, Verizon Wireless, is a joint venture with Verizon Communications , has repeatedly dismissed the notion. "We would not be interested in the T-Mobile USA assets," a company spokesman said Sunday.

GROWTH ENGINE

"Potential buyers of T-Mobile USA do not seem to be forming a queue," analysts at CSFB said in a research note last week. Deutsche Telekom would have to perform a strategic about-face if it sold the business.

T-Mobile USA has been among the fastest growing U.S. providers in recent years, with a more than 30 percent rise in customers and core earnings growth of nearly 50 percent in 2004.

T-Mobile USA had $2.85 billion in revenues and more than 18 million customers at the end of the first quarter.

Moreover, it was the sole growth motor of the entire Deutsche Telekom group. With fixed-line revenues in its domestic market and mobile sales in most of Europe slipping, T-Mobile USA is Chief Executive Kai-Uwe Ricke's brightest star.

"Ricke can kiss good-bye to his goal to be the fastest-growing European integrated telecoms operator if he sells T-Mobile USA," said one fund manager. "There is nothing he could buy that would deliver growth on the same scale."

After the latest round of consolidation in the U.S. mobile industry, which had six large players this time last year, the number of national operators is expected to drop later this year to four from five.

Analysts say T-Mobile, the smallest of the four operators, will have to prop up spending if it wants to keep pace.

"(It must) either commit to this, or look to divest itself of the asset at the best price," said Rich Nespola, chief executive at U.S. consultancy Management Network Group.

Spending includes 3G technology, which mobile operators hope will raise revenues as it becomes much more than a portable device for phone calls.

"They need 3G because data services are the only path to continue growing that makes sense," said a fund manager.

After operators spent around 100 billion euros ($121 billion) on 3G licenses in Europe in 2000, investors fret about a similarly inflated series of U.S. spectrum auctions next year. But the consolidation has reduced the number of bidders and might help make the next auction less expensive.

"It's not really clear what it all will cost," said a fund manager. "In the worst case, you could look at $10 billion (for spectrum and network gear). But as things stand now, I'd rather expect $5 billion over three to five years."

"That's manageable. They can do that, even without (their credit rating) being cut. To me it looks as if that's what's going to happen." ($1=.8275 Euro) (Additional reporting by Kenneth Li and Sinead Carew in New York)