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Bloomberg Reports Sprint and T-Mobile U.S. Close to Merger

Bloomberg reports that Sprint and T-Mobile U.S.A. are close to a merger whereby Sprint would acquire T-Mobile U.S. for $40 a share (up 17% from the current $34), valuing the company to $31bn. Deutsche Telekom (DTAG), which holds a 67% stake in T-Mobile U.S.A., would receive 27.5% in cash, 27.5% in Sprint stock and retain a 12% stake in T-Mobile U.S.A.

T-Mobile U.S.A. had 2013 revenues of $24.4bn, had a net margin of 0%, and a net debt of $14.6bn.

If it happens, the transaction would be announced by July. It would include a break-up fee, which would range from $1bn to $3bn. The deal is conditional on regulatory approval, which may be difficult to receive.

Consolidation of the telecoms industry in the U.S. has accelerated, with AT&T bidding for DirecTV, Comcast set to acquire Time Warner Cable, Verizon having acquired Verizon Wireless, T-Mobile U.S. itself having purchased MetroPCS. AT&T had in 2011 attempted to acquire T-Mobile USA for $39bn in cash and stock. The deal faced opposition by regulatory agencies and AT&T withdrew the offer  in late 2011, and paid a break-up free to Deutsche Telekom of $3bn in cash and $1bn in assets.

Deutsche Telekom would gain in the short-term $8bn in cash with the sale of T-Mobile U.S.. The company is to face options including redistributing cash to shareholders, reducing its debt, reinvesting in its business or making M&As in Europe. There had been talks of a merger with Orange, once T-Mobile U.S.A. would be sold. There is also the reported intention to sell or IPO Deutsche Telekom’s JV with Orange in the U.K.: EE.

In all cases, DTAG is to accelerate consolidation of the telecom industry in Europe. DTAG is also likely to reconsider T-Systems. The company has regained momentum in the past 5 years, through an aggressive large IT infrastructure management  strategy and an acceleration of its transformation towards the cloud. The company has recently also accelerated divestments in geographies e.g. desk-side support in Germany, Italy or its systems integration arm in France; and reconsidering loss-making contracts.

Nevertheless, in spite of its transformation efforts, T-Systems remains loss-making, with no short-term sign of a return to profitability. DTAG is therefore likely to make a decision on T-Systems. If the T-Mobile U.S.A. deal goes through, DTAG would have the cash to reinvest organically in T-Systems, acquire to transform its service portfolio or simply aim to sell it.  Whatever the decision, the T-Mobile U.S.A. deal is to unlock the future of T-Systems. 

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