T-Mobile US Sale Fits DT's All-IP Game Plan
If Deutsche Telekom were a soccer manager, then T-Mobile US would probably be the maverick midfielder, full of flair but never quite a team player. And like other talented solo artists, T-Mobile has long been on the manager's for-sale list. Having tried and failed to negotiate deals with AT&T and Sprint, Deutsche Telekom may now be in discussions with satellite TV company Dish Network, according to reports that originated with the Wall Street Journal.
To stretch the soccer analogy, Deutsche Telekom AG (NYSE: DT)'s current position seems to be that owning T-Mobile US Inc. is no bad thing. The operator has scored some dazzling goals over the last couple of seasons while other players have been misfiring. Were it not for T-Mobile, Deutsche Telekom would look far less dynamic. But in the long run, T-Mobile just doesn't conform to the game plan.
When approached by Light Reading for this story, Deutsche Telekom said it "does not comment on rumors and speculation" but referred to comments made by CEO Timotheus Höttges at a recent shareholder meeting. "Deutsche Telekom has no pressure to sell T-Mobile," said Höttges. "We are very pleased with the performance and the management of T-Mobile."
But Höttges is surely just biding his time. No manager wants to sell a gifted player in a hurry at the wrong price, and the Deutsche Telekom boss is simply waiting for the right deal to come along, as he indicated before the shareholder meeting during an earnings call with analysts. "If any opportunities were to come up in the US that help us to create even more value than we're creating right now, then, and we've always been quite clear about that, we will at least consider such options," he said ( see this Seeking Alpha transcript of the entire call ).
So what is the game plan? In a nutshell, it's to create a pan-European, all-IP network, taking advantage of technologies like NFV and SDN to drive efficiency and service agility. T-Mobile evidently has no place in that vision. "Building an IP service for the US would not really make sense -- there is too much water in between [the US and Europe]," Höttges told reporters at this year's Mobile World Congress.
What's more, the sale of T-Mobile could actually help Deutsche Telekom to realize this all-IP, European vision more quickly and completely. For one thing, Höttges could re-invest the proceeds from a sale in the rollout of high-speed European networks and the all-IP conversion. By 2018, it wants to make 100Mbit/s services available to 50% of the population in European markets where it owns fixed-line networks (that means Croatia, Greece, Hungary, Slovakia and Romania). By the same date, it's also hoping to have turned off its PSTN systems everywhere outside the US. Right now, its only all-IP subsidiaries are in Macedonia and Slovakia. (See T-Mobile US Spurs Growth at Deutsche Telekom.)
The real question is whether a T-Mobile sale could support European acquisitions outside Deutsche Telekom's current footprint that an all-IP strategy would justify. Analysts at Goldman Sachs & Co. and Exane BNP Paribas have told Light Reading that Deutsche Telekom's IP capabilities would allow it to benefit enormously from such cross-border consolidation. The thinking seems to be that Deutsche Telekom could fatten up its margins by offering services in new markets from a single European location. It is already testing this IP-based model of maintaining one "factory" for several countries through a service trial in Croatia, Hungary and Slovakia. (See Deutsche Telekom Turns On Pan-European IP.)
Trouble is, Deutsche Telekom is not in a strong position for major M&A activity, with a net debt that currently represents about 2.6 times its annual EBITDA. A sale of T-Mobile could change all of that by reducing debt to the comfort-zone ratio of 2-2.5. At the time of writing, T-Mobile's market capitalization on the New York Stock Exchange was about $31.06 billion, its share price having risen by 2.6% on June 4, when the latest rumors of a deal with Dish Network LLC (Nasdaq: DISH) first surfaced. (See Deutsche Telekom Buoyed by US Growth.)
Deutsche Telekom insists it is not planning "major acquisition outside [the] footprint," referring to a statement it made at its recent Capital Markets Day. But analysts are not convinced. "Post a T-Mobile sale we would expect Deutsche Telekom to purchase assets in Europe," said Kohulan Paramaguru, an analyst with Exane BNP Paribas, during a previous conversation with Light Reading. (See All-IP DT Could Drive Euro M&A, Say Analysts.)
Several years ago, soccer pundits used to note the differences between Real Madrid and Barcelona, two Spanish teams that are among the world's best. Real Madrid had amassed a collection of "galacticos" -- high-profile players who were brilliant but not always cohesive -- while Barcelona's academy-developed professionals sometimes seemed to play with a single brain. Deutsche Telekom wants to be more like Barcelona.
— Iain Morris, , News Editor, Light Reading