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Deutsche Telekom could look for T-Mobile USA merger
Published: 7 February, 2010
Tags >> M&A | US | T-Mobile USA
Deutsche Telekom may have hit delays to the merger of its UK unit with Orange UK, but it may still be pursuing new options for other wireless subsidiaries. Once again, reports are circulating that the telco will spin off or merge its T-Mobile USA arm.
The Wall Street Journal says TMo USA could be fully or partly divested, though most analysts believe a full IPO is unlikely, and that a partial spin-off could be the prelude to a merger deal. Robin Bienenstock, senior analyst at Bernstein Research, wrote in a research note: "DT's mere consideration of a spin-off may be seen as an admission that consolidation of the US market as it stands is unlikely. On the other hand, a partial spin could be seen as giving T-Mobile USA its own currency, with which it could pursue consolidation without dilution to existing DT shareholders, or without increasing DT's exposure to the US market."
Many of the recurring rumors surround a merger with Sprint, though the third US cellco is in poor financial health and still seeking to smooth over problems resulting from its last acquisition, of Nextel. Also, the two cellcos have incompatible networks, although they could converge at the 4G stage if T-Mobile, as also speculated, joins the Clearwire WiMAX joint venture, in which Sprint is the largest shareholder.
Another popular piece of speculation is that Leap Wireless - which recently hired bankers to investigate its own M&A options - would merge with its flat rate rival/partner MetroPCS and TMo in a three-way transaction. This would create a major player in the prepaid market, in which Leap and MetroPCS specialize, and on which both TMo and Sprint are increasingly dependent. When Verizon Wireless recently indicated stronger prepaid growth, it was a warning bell that the big two telcos would not ignore this high growth sector for long, and the smaller players would need greater scale to fend them off.
A three-way merger would be complicated in terms of harmonizing the business cultures and the networks (MetroPCS and Leap both use CDMA). It would be good for scale and footprint though - all three use the PCS and AWS bands and Leap would fill many gaps in TMo's coverage in smaller markets.
Kevin Fitchard of Connected Planet even makes a case for AT&T to snap up TMo, though this would almost certainly hit regulatory problems. "The perfect partner for T-Mobile would be none other that AT&T," he writes. "They use the same technologies, GSM and HSPA, and while they may be running 3G on different bands, that might actually work out to their advantage. I can envision AT&T using T-Mobile's AWS HSPA network as a sort of super-3G overlay strictly for data cards and other high bandwidth devices. It's easier to procure USB dongles at T-Mobile's weird frequencies than it is smartphones."
Whichever cellco might be interested in TMo, Deutsche Telekom would get various advantages from a partial IPO or spin-off, which would reassure its nervous investors, says the WSJ. Its report said DT had held meetings recently with a number of banks to discuss funding an IPO, possibly of about 20% of the firm. This would raise additional funding for TMo's 3G expansion. Or a partial spin-off would give TMo its own balance sheet. The operator controls roughly 14% of the US market, and ended the third quarter with 33.4m subscribers, reporting net income down from $442m a year earlier to $417m.
