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DT Serves Up American Pie

Deutsche Telekom AG's (NYSE: DT) U.S. wireless operation is filling out nicely, which ought to have a few potential buyers licking their lips and getting even hungrier for a piece of the pie.

T-Mobile USA, a combination of the service providers formerly known as VoiceStream and Powertel, added 525,900 new net subs in Q2 (second only to the 723,000 additions at Verizon Wireless) -- not bad for the sixth-largest player. T-Mobile USA now has about 8 million customers, with an average revenue per user (ARPU) of $51, up $1 on the previous three months. Of those subscribers, an impressive 80 percent are of the more sought-after post-paid variety.

With debt reduction a key aim at Deutsche Telekom (DT), the market is buzzing again with reports that it is seeking a buyer for a stake in T-Mobile USA that would leave the German carrier with a minority holding (see T-Mobile US up for Grabs? and AT&T/VoiceStream Rumors Rife). Deutsche Bank AG, Goldman Sachs & Co., and J.P. Morgan Chase Bank & Co. are said to have been mandated to arrange the sale, with Cingular Wireless the current favorite to become controlling partner.

Helmut Sihler, DT's temporary CEO, insists it is "not true" that the carrier has already decided to sell certain parts of its business, but admits there are "talks, contacts, but no negotiations" with wireless operators in the U.S. Basically, he's committing to nothing while DT plays footsie with potential partners.

Some sort of deal seems likely, if only because DT really needs some cash. By its own admission the carrier has "problems, we have to reduce the debts." In fact, it wants to see the red on its balance sheet ebb from €64.2 billion at the end of this June to €50 billion by the end of 2003. Sihler admits DT is "not in a position to get new capital for T-Mobile" through an IPO, and added that this market freeze could continue until the end of next year.

Bigger-ticket items that DT could sell from its T-Mobile stable include T-Mobile UK or T-Mobile Austria, but neither looks even remotely likely. In addition, there is already established interest in the U.S. asset, where a combination of T-Mobile USA and Cingular would provide a serious challenge to Verizon Wireless, as both would have about the same number of subscribers -- just over 33 million. With so many hurdles to overcome even if a deal is struck, this saga looks set to run and run.

In the meantime, DT's suffocating debt load is also choking the network equipment suppliers, as capital expenditure is one of the easier costs to cut. Kai-Uwe Ricke, who heads up T-Mobile, replied to analyst questions about 3G capex by saying "we don't want to over-invest -- we don't want to build an infrastructure before we know what kinds of terminals and applications there are. The guidance is: Let's follow the revenues, the data revenues, and build the right infrastructure." Such statements will not be doing much for blood pressure levels at T-Mobile's various suppliers, including Siemens AG (NYSE: SI; Frankfurt: SIE), Motorola Inc. (NYSE: MOT), Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Ericsson AB (Nasdaq: ERICY) and Nokia Corp. (NYSE: NOK).

He would not say how much is due to be spent on 3G rollout next year, but stressed that DT would meet its license requirements. This sounds uncomfortably like KPN Mobile's hint that it won't do any more than it absolutely has to. T-Mobile's itsy-bitsy 3G capex of €200 million to €250 million for this year is earmarked mainly for site preparation in Germany.

The results for T-Mobile in Q2 saw a total revenue of €4.6 billion, up 42 percent year-on-year (mainly thanks to acquisitions). The EBITDA was €1.34 billion, up 71.7 percent year-on-year, principally for the same reason, and the gross loss was €660 million, a 30.7 percent year-on-year improvement. T-Mobile had 51.6 million subs in its majority-controlled operations as of June 30, 2002, and access to a total of 71.5 million, once proportions of customers from minority holdings are accounted for.

DT overall had a bigger than expected loss of €3.9 billion, including goodwill amortization of €1.5 billion at VoiceStream and in mobile licenses -- not a patch on KPN Telecom's mobile writedowns (see KPN Bites the 3G Bullet). Its total revenue in the first six months of 2002 was €25.7 billion.

— Ouida Taaffe, special to Unstrung
http://www.unstrung.com
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