Deutsche Telekom’s Sale of T-Mobile USA to AT&T is a Great Deal ( by Allan C. Nichols, CFA)
Deutsche Telekom (DTE) has agreed to sell T-Mobile USA to AT&T (T) for $39 billion. We think this is a great deal for DT--if the firms can win regulatory approval--as it comes at a price well above that recently rumoured in a deal with Sprint Nextel S. The price is also above what DT paid a decade ago to enter the US wireless market, allowing it to book a gain on the investment. The price is about 7.1 times T-Mobile's 2010 EBITDA, which we think is very generous for a wireless business that lost subscribers in 2010 and is spectrum-constrained.
The combined firm expects to be able to generate more than $3 billion in annual synergies. Once the deal closes, AT&T will be able to offer the iPhone to T-Mobile's 26 million postpaid subscribers. The deal also resolves T-Mobile's spectrum dilemma as LTE network technology takes root across the industry. The biggest issue is regulatory approval. We had thought that the current administration wouldn't allow AT&T or Verizon Wireless (VZ) to make any additional significant acquisitions, given the size advantages they already enjoy. This is where AT&T's formidable lobbying machine comes into play. AT&T will claim that the combined firm will benefit consumers by allowing a faster and more thorough buildout of an advanced LTE network, which will improve data services. We remain wary of regulatory approval and will probably increase our fair value estimate only modestly. If nothing else, DT will gain about $1 per share in value from the $3 billion cash breakup fee if the deal doesn't go through.
If the deal goes through, though, our fair value estimate could increase substantially more. DT plans to use EUR 13 billion of the proceeds to pay down debt, which will lower net leverage to 1.9 times EBITDA from 2.2 times currently. The firm will also buy back an additional EUR 5 billion worth of stock on top of its existing share-buyback programme.
Find out Morningstar’s view on the regulatory response to the DT – AT& T deal.
AT&T's T-Mobile Deal Could Hurt Sprint (by Michael Hodel, CFA)
Sprint Nextel (S) is the clearest potential loser, in terms of impact on valuation, if AT&T is successful in acquiring Deutsche Telekom's T-Mobile USA unit. We believe some elements of this deal could work in Sprint's favour, and regulatory approval is far from certain. We also don't expect the deal to affect Sprint's turnaround in the near term. However, we are increasing our fair value uncertainty rating for Sprint to very high for the time being.
The biggest problem for Sprint is that it loses an option for both itself and partner Clearwire (CLWR). Rumours have swirled for months that T-Mobile has looked at buying spectrum from or investing directly in Clearwire, giving the upstart cash with which to continue its network buildout. Though tougher to fathom, Sprint and T-Mobile have also allegedly held direct merger talks. While a deal of any kind with T-Mobile was far from certain, having the option provided Sprint with increased leverage in negotiating with other industry players, like Leap Wireless (LEAP), as alternatives to gaining scale. The market now seems to assume that Sprint will have to pay up for one or more smaller wireless carriers.
Operationally, clearing T-Mobile out of the market could benefit Sprint. The two have battled to secure the lower end of the postpaid market and to gain share in prepaid as well. Sprint would be left as the only major alternative to the big two and the primary player pitching value-oriented pricing plans. Ultimately, though, the value strategy would be tough for Sprint to follow, given that firm will operate at a huge cost disadvantage relative to AT&T.
We don't believe AT&T's deal for T-Mobile will be the last in the industry. We'll be watching closely to see how Verizon Wireless responds. If regulators approve the T-Mobile deal, it would be a clear message that Verizon Wireless too could have gotten bigger. However, once the T-Mobile deal closes, the level of concentration in the industry may be too great to permit additional large-scale consolidation. As a result, Verizon Wireless may feel pressure to get a deal of its own on the table in short order. A combined Verizon Wireless and Sprint would have 23% more customers than a combined AT&T and T-Mobile, smaller than the gap that will emerge between AT&T/T-Mobile and a stand-alone Verizon Wireless. Verizon Wireless could also try to work a deal for U.S. Cellular's USM 5.7 million customers, though that firm has been fiercely independent in the past. Such a deal would remove another option for Sprint.
The cable companies, including Comcast (CMCSA) and Time Warner Cable (TWC), also come into play. To the extent that these firms need a wireless partner, the number of options they have will also shrink if T-Mobile is out of the mix. As AT&T is one of cable's biggest competitors, additional scale at the firm could hurt, though we doubt AT&T will significantly alter its consumer fixed-line strategy in the near term as a result of this deal.
