Deutsche Telekom’s U.S. exit turns nightmare into bad dream
By Una Galani
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
LONDON — Deutsche Telekom’s U.S. nightmare may end up being just a bad dream. Despite pulling its portfolio into shape by negotiating a juicy sale of T-Mobile USA to cellphone giant AT&T for $39 billion in cash and stock, its decade-long investment in U.S. mobile will still be remembered with a wince.
The 13 percent rise in Deutsche Telekom’s share price on news of the agreement reflects the fact that, in absolute terms, this is a good deal. The exit multiple of 7.1 times historic EBITDA is about a one-third premium to peer group trading multiples. If the deal is blocked, Deutsche Telekom gets a break fee worth around $6 billion, comprising some cash and some spectrum and roaming access, according to a person familiar with the situation.
But this deal doesn’t vindicate Deutsche Telekom’s original entry into the United States by agreeing to buy Voicestream, T-Mobile USA’s forerunner, in 2000. The German operator paid $51 billion cash and stock to purchase the business, a valuation equivalent to twice the market rate per subscriber at the time.
Since completion, the business has generated $8 billion of cash, post capex and licences but before tax, according to one analyst. Factor that in, and the value destruction from the top-of-the-dotcom-market deal is only $4 billion, spread over a decade, or 8 percent of the original deal price. Deutsche Telekom would not have done any better investing in German blue-chips, even after factoring in dividends.
Of course, this isn’t a clean break. Deutsche Telekom is left with an 8 percent stake in AT&T — although optimists will want to believe this represents further upside. The bulk of the sale comes in cash, cutting debt and still leaving scope for buybacks and investment.
After combining its UK business into a joint venture and buying out minorities in Poland, the group is in better shape to push data services in its core European market. As chief executive Rene Obermann says, Deutsche Telekom is “fixed.” No wonder he’s also playing down the idea that big M&A might be back on the cards.