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Telekom's breakup package buys time

by Andrew Bulkeley in Berlin | Published December 20, 2011 at 1:14 PM

Regulators forced AT&T Inc. to abandon its $39 billion acquisition of Deutsche Telekom AG's T-Mobile USA Inc., but a breakup package including a record-setting $3 billion fee and wireless spectrum could enable the German telecom to get the unit humming before CEO Rene Obermann makes another round of calls to potential suitors.

AT&T will pay Telekom of Bonn $3 billion in cash and grant it wireless frequencies as well as a new seven-year roaming agreement in a package worth between $5 billion and $6 billion.

"The breakup fee will help them move forward. They can stabilize customer numbers and then think about another deal in the midterm," said Warburg Research analyst Jochen Reichert, who is maintaining his buy rating on the stock.

Obermann has been trying to unload T-Mobile USA since identifying it as a problem child in 2009. As the country's smallest mobile phone provider, T-Mobile USA had trouble attracting lucrative smartphone customers early and instead carved out a niche as a downmarket player.

Its low prices meant the company had trouble keeping up as consumers demanded ever-faster mobile networks, however, eventually sparking an exodus of customers. Although competitive pricing reeled in 312,000 new prepaid customers in the third quarter, T-Mobile USA also saw the departure of 186,000 contract customers, its more valuable constituency. T-Mobile has about 33.7 million clients in the U.S.

Although Telekom and San Antonio-based AT&T initially said they would be able to sway regulators, the Justice Department launched a suit to halt the deal, and the Federal Communications Commission also expressed severe concerns about the market's No. 2 and No. 5 competitors merging.

Regulators and consumer groups seemed especially concerned about the loss of a low-price competitor that helped cap prices.

Now Telekom finds itself where it started last March, before the deal was announced.

Well, almost. "Deutsche Telekom is about $5 billion richer," said Silvia Quandt Research GmbH analyst Jacques Abramowicz, who has a buy rating on the stock. Telekom had hoped to use the proceeds from the T-Mobile deal to cut debt by €13 billion ($16.9 billion), the analyst said.

"The company also needs funds to upgrade its fiber-optic and wireless networks in Germany and other European markets," Abramowicz said.

Most analysts agree that Telekom won't announce a fresh deal in the next year and believe the company's options have now dwindled significantly because of the attempted merger. Despite previous rumors of links with Sprint Nextel Corp., such a tie-up is no longer likely because of the regulatory resistance to the AT&T agreement.

If it still wants to unload the company, Telekom could open talks with regional wireless providers or cable companies hoping to use smartphones as new outlets for media content, analysts said.

During a conference call Tuesday, Telekom CEO Obermann took aim at U.S. regulators who he said refused to show any flexibility.

"To the very end there was no sign that there was any interest in taking a detailed look at the proposed conditions," he said.

Telekom said Tuesday it would gain wireless frequencies in 12 of 20 key U.S. markets -- frequencies currently unavailable on the market. It also said the roaming contracts would expand its reach to 280 million potential customers from 230 currently.

The company could dust off plans to sell shares in the unit either to finance an expansion or completely exit the market. However, an initial public offering likely would yield far less than the original AT&T agreement. Warburg's Reichert said he would value T-Mobile USA at about $20 billion.

Telekom first entered the U.S. market in 1995 when it acquired a minority stake in Sprint, which it eventually sold.

In 2001, Telekom struck a $24 billion deal to buy VoiceStream Wireless Corp. and Powertel Inc., which it rebranded T-Mobile.

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