February 1, 2017
There is little apparent love lost between Donald Trump's nascent administration and Germany's political leadership. Peter Navarro, Trump's maverick trade advisor, has just accused Germany of abusing the euro currency to exploit other countries. German Chancellor Angela Merkel has been a refreshingly outspoken critic of Trump's "Muslim" travel ban. But could Trump's telecom policy inadvertently and indirectly give a boost to Germany's broadband market?
Hopes are running high that officials appointed by the new president could unleash a frenzy of deal making in the telecom sector. And a prime takeover target is likely to be mobile operator T-Mobile US, whose controlling shareholder remains Deutsche Telekom AG (NYSE: DT).
The German fixed-line incumbent has already tried selling T-Mobile US Inc. a couple of times -- first to rival AT&T Inc. (NYSE: T) and then to Sprint Corp. (NYSE: S), another mobile competitor -- only to see its efforts thwarted by US regulators opposed to sector consolidation.
Even before Trump took charge, however, T-Mobile's own executives had voiced optimism that a new administration would be more "open" to M&A activity. That confidence seems justified by recent developments, including the appointment as chairman of the Federal Communications Commission (FCC) of Ajit Pai, who is thought to sympathize with telco arguments about the need for consolidation. In a possible sign of investor excitement about a forthcoming deal, T-Mobile's share price has now gained about 23% on the Nasdaq since November 8, when Trump won the presidential election, and is up 3.4% since January 23, when Pai's appointment was announced. (See Pai Opposes Title II, FCC Alums Oppose Pai.)
The rollout of Gigabit broadband access networks is spreading. Find out what's happening where in our dedicated Gigabit Cities content channel here on Light Reading.
Prospective T-Mobile suitors could include Sprint, now owned by SoftBank Corp. of Japan, besides cable giants Charter Communications Inc. and Comcast Corp. (Nasdaq: CMCSA, CMCSK), which have made no secret of their desire to enter the US mobile market. Based on its current share price, T-Mobile is worth about $51.3 billion. That means a sale at that level could potentially net Deutsche Telekom as much as $34 billion, given the German operator's 66% ownership stake.
It would be a surprise if Deutsche Telekom were not already considering a T-Mobile divestment. Previously, the only thing standing in the way of a sale has been US competition authorities. The German operator has made light of the failed attempts to land a deal, drawing attention to continued revenue and customer growth at T-Mobile. But the unit has for a while seemed like a peculiar appendage rather than an essential limb. Under its current strategy, Deutsche Telekom is focused on building a pan-European network made up of fixed, mobile and IT assets. Other than as an engine of sales growth, it is hard to see how T-Mobile fits in. (See DT Earnings: US Parties On, Europe Hungover.)
What's more, as Europe's biggest service provider, Deutsche Telekom faces an escalating bill for the network upgrades that will be needed to support new digital services. In Germany, by far its biggest market, it is pouring funds into vectoring, which boosts connection speeds on last-mile copper loops to an upper limit of 100 Mbit/s. But the gigabit revolution now happening in other parts of Europe already makes this technology look antiquated. Even Deutsche Telekom has acknowledged that it will soon have to start thinking about a more dramatic network overhaul. "After 2018 or 2019, we have to discuss what the next step toward more broadband could look like," said Timotheus Höttges, Deutsche Telekom's CEO, during an earnings call in November. (See Germany's Gigabit Lag.)
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Proceeds from a T-Mobile sale, then, might go some way toward equipping Germany with a state-of-the-art fiber network (the cost of extending fiber to every home in Germany has been estimated at €60 billion to €80 billion, or $65 billion to $86 billion at the current exchange rate). They could also be used to finance upgrades in other central European markets. With 5G on the horizon, Deutsche Telekom may need capital for new spectrum licenses and mobile sites -- not to mention the fiber "backhaul" underpinning higher-speed mobile services. (See DT Eyes FTTH Solution to German Opex Issue.)
Additionally, a T-Mobile sale could help to reduce Deutsche Telekom's net debt, which is this year in danger of exceeding a "comfort-zone ratio" of 2.5 times annual EBITDA. It would lighten Deutsche Telekom's load in other ways, too. Ultimately, the US business has been a drag on resources, gobbling up as much as €4.7 billion ($5.1 billion) in capital expenditure over the first nine months of 2016. To put that figure in context, US investments were about 1.6 times what Deutsche Telekom spent in Germany over the same period, and more than twice what it spent across the remainder of its European markets. Capital intensity (capital expenditure as a percentage of sales) stood at 17.7% in Germany but as much as 19.3% in the US.
For all T-Mobile's bluster, Deutsche Telekom executives do not seem to think it can forever withstand the might of AT&T and Verizon Communications Inc. (NYSE: VZ), the country's two biggest players, as a standalone entity. That implies that some kind of deal is a certainty, regardless of when it happens or what form it takes. But with T-Mobile's share price at a 12-month high, and regulatory officials willing to play ball, the circumstances have rarely been so auspicious.
Keen to address the gigabit lag and make Germany a leader in the emerging digital economy, German authorities are heavily dependent on the country's biggest telco. If a T-Mobile deal comes off in the next few months, they may have one reason to feel more warmly about the Trump establishment.
— Iain Morris, , News Editor, Light Reading
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