October 28, 2011
In recent weeks, Sprint’s shares have been hammered. The share price has fallen by 40% since the beginning of the year, reflecting investors’ concerns about the long-term position of Sprint in the US wireless market. Not surprisingly, Sprint has been the most vocal opponent of the planned $39B acquisition of T-Mobile US by AT&T, which was announced in March 2011. Sprint argues that the deal would manifest itself in a loss of competition in the US wireless market if the fourth- and second-largest wireless carriers in the US merge (Sprint is No. 3). The US Department of Justice (DoJ) seems to share this concern and blocked the acquisition in August 2011 in order to preserve a vibrant and competitive marketplace.
Despite the DoJ’s opposition, most observers expected some form of compromise to emerge, even if it took a court fight to do so. Both AT&T and Deutsche Telekom (DT) reiterated their eagerness to pursue the deal as the DoJ announced its decision. However, in our view, Sprint’s challenging situation increases the likelihood that the deal will not go through as planned: Sprint looks weaker now than several months ago. Its announcement in October 2011 that it will take on additional debt to fund the rollout of its LTE network only increases liquidity concerns. This will sway the DOJ’s position further toward rejecting the deal for good in an effort to support a healthy US wireless market.
Should the deal ultimately fall through, this would have significant and negative ramifications for Deutsche Telekom. The cash component of the deal is €18B, of which DT has penciled in €13B for debt reduction. No deal, and Deutsche Telekom’s net debt remains higher than planned. Also, Deutsche Telekom would receive an approximately 8% stake in AT&T as part of the deal. The higher interest payments and the absence of dividend payments would translate into reduced funds for investments in network infrastructure. This would constitute a blow for Deutsche Telekom’s long-term strategy. Broadband forms an integral part for several aspects of Deutsche Telekom’s strategy, namely to build networks and processes for the Gigabit society. (Deutsche Telekom would be somewhat consoled by a €3B cash break-up fee from AT&T in case the deal falls through.)
At this stage, there are no public signs by Deutsche Telekom what its Plan B might be. We believe the deal is unlikely to go through as planned, not least because the FCC would have to give its approval to transfer the wireless licenses irrespective of the final DoJ decision. Meanwhile, the DoJ will take several months to consider AT&T’s appeal. It is high time for Deutsche Telekom to adjust its strategy for the eventuality of the deal falling through. It needs to have answers to questions about how it plans to fund infrastructure projects in its domestic market and Europe and what its US 4G, customer acquisition, and partner strategy will be.