Deutsche Telekom is aiming to become market leader in the United States, Chief Executive Tim Hoettges has said, now that a deal for its T-Mobile US unit to take over Sprint is within reach.
Striking a bullish tone after a New York judge threw out a petition brought by a dozen US states to block the deal, Hoettges said the ‘new’ T-Mobile would go on the attack and look to close a valuation gap with AT&T and Verizon.
“We have the chance to become No.1 in the United States, to overtake AT&T and Verizon. That is our ambition,” Hoettges told reporters in Bonn after Deutsche Telekom reported record annual results in its 25th year as a listed company.
Ebullient, Hoettges brandished a coffee cup bearing a picture of US World War Two character Rosie the Riveter and the slogan ‘We Can Do It’ in front of photographers. His mood was buoyed further by a 3.7% jump in Deutsche Telekom shares, bringing year-to-date gains to 13%.
“The results were strong, particularly in Europe, and reassuring on Germany,” said Citi analyst Georgios Ierodiaconou.
Hoettges, 57, has campaigned for seven years to do a US deal that, on completion, would create a transatlantic business with $120 billion in revenues and 270 million customers. A breakthrough came in April 2018 when T-Mobile and Sprint, controlled by Japan’s Softbank Group, agreed to a $26 billion all-stock deal.
The process of winning anti-trust approved dragged: Concessions offered in a back-and-forth with US regulators brought the deal close to the finish line last year, but the suit filed by attorneys general from mainly Democrat-led states threatened to derail it within sight of the finish line.
With last week’s New York court ruling in favour of the deal, Hoettges now expects it to close by April 1, subject to resolving outstanding regulatory and legal issues.
Importantly, synergies of $43 billion targeted in the original merger remained intact, Hoettges said. Once completed, the German group would own 42% of the ‘new’ T-Mobile but have a voting stake of 67% and control of the board.
Hoettges declined to comment when asked whether T-Mobile would seek to drive a harder bargain in the deal, which has passed its expiry date but is still supported by both parties, to reflect a deterioration in Sprint’s business.
Highlighting the positive market reaction after the New York ruling, Hoettges said the new T-Mobile would have a market value on paper of around $120 billion. That compares with $274 billion for AT&T and $242 billion for Verizon.
“That is a difference of around $120 billion. I see no reason why this cannot be reduced considerably,” he said, highlighting Sprint’s spectrum assets as a key competitive advantage.
The three main US wireless carriers would have similar customer numbers of between 140 million and 150 million, Hoettges added: “That puts us on an equal footing and in a position to ramp up attacks on the competition.”
Deutsche Telekom forecast core earnings of 25.5 billion euros (approximately $27.5 billion) this year, representing a slowdown in growth to 3% and below analysts’ consensus forecast.
That guidance does not take into account the impact of the US merger and Deutsche Telekom will revise its outlook once it goes through.
Uncertainty over the deal has weighed on the group balance sheet, as have the heavy costs of building next-generation 5G networks, forcing Deutsche Telekom in November to say it would cut its 2019 dividend.
The group reduced its net debt by 2.8 billion euros in the fourth quarter to 76 billion euros, bringing its leverage ratio back down to 2.65 times adjusted EBITDA – back within management’s comfort zone of 2.25-2.75 times core earnings.
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