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Feb. 8, 2010

Rumors are flying that Deutsche Telekom is considering some options for its underperforming T-Mobile USA subsidiary.

Some of those options might include making T-Mobile USA public, reported Reuters late Friday.

Recently, Deutsche Telekom has held initial talks with a few banks but no formal deal was under way and making T-Mobile USA public is just one of several options, after the Wall Street Journal reported that the German company was preparing a U.S. IPO or possibly a spin-off, either in the first or second quarter.

Some think an IPO would'nt be the best option for Deutsche Telekom however, which is also exploring a sale, an expansion or a partnership with another wireless carrier.

Scott Sweet, a senior managing partner at advisory firm IPO Boutique says "it may be more of a test to gauge the market's assessment of what T-Mobile's value is either for merger activity or an all out IPO per se."

Sweet added that T-Mobile isn't a "must have" IPO, given its similarities to rivals Verizon Wireless and AT&T.

First, valuation estimates vary widely, depending to whom you talk to. Merck Finck bank said a sale of 20 percent of T-Mobile USA could bring proceeds of about 5 billion euros, or about US $6.9 billion. But Macquarie analyst Phil Cusick estimated that all of T-Mobile USA may have an equity value of $14 billion based on 2010 earnings estimates.

Some disagree on these numbers, however.

LBBW analyst Stefan Borscheid said he expects Deutsche Telekom to make a decision by the end of 2010 whether it will sell or keep its U.S. subsidiary. Borscheid isn't so sure if T-Mobile will ever become public, however.

"I think that it's plausible that Deutsche Telecom is looking to spin off T-Mobile simply because they don't see a strong cash flow from the company's operations anymore," Sweet added.

Once prized as Deutsche Telekom's growth engine, in the past, T-Mobile has struggled with a high rate of customer churn rate and cancellations last year, and then trailed its bigger rivals in building high-speed services. As a result, Deutsche Telekom has been searching for the right strategy for its now distant No. 4 mobile service provider in the United States.

But any decision that could hurt Deutsche Telekom's ability to pay its dividend is highly unlikely due to a commitment to stockholder payouts, hence the reason why some Wall Street analysts now think that the german wireless carrier might place T-Mobile USA on the IPO market some time this year.

"Even if we believe that options such as an IPO of T-Mobile USA or a straight sale of the company would lead to a higher stock price, we still believe that the search for a strategic partner is a much more likely scenario," said Sweet.

While Verizon Wireless and AT&T, currently the top 2 mobile service providers in the U.S., may have big financial resources, some Wall Street analysts still doubt that U.S. regulators and the FCC would let them acquire more market share. Each company currently enjoys about 31.6 and 30.7 percent respectively of the U.S. market.

Additionally, Verizon Wireless, a venture of Verizon Communications and Vodafone Group PLC uses CDMA network technology, which is incompatible with T-Mobile USA's GSM network, making things technologically even more complex.

If Deutsche Telekom does go ahead and sells T-Mobile USA, there is still no obvious buyer in sight even in a fiercely competitive market that may be in need of consolidation, at least in the U.S.

For its part, Sprint Nextel, the number three U.S. wireless carrier, which has been struggling to compete, would face even bigger technology hurdles in such a transaction.

Analysts have cited smaller rivals MetroPCS Communications or Leap Wireless as potential merger candidates as well for T-Mobile USA, but technology issues there would also complicate those deals, just the same as it would for Sprint Nextel.

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Source: Reuters.