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Deutsche Telekom AG, the German telecom giant, recently agreed to sell its T-Mobile USA Inc. subsidiary to AT&T Inc. for $25 billion in cash plus equity, using the proceeds to pay down debt and buy back shares. This move signals DT’s withdrawal from the global struggle for dominance as it renews its pursuit of becoming a profitable regional player within Europe.
The AT&T/T-Mobile USA deal has some real advantages. As the sale is substantially cash-based, the value of T-Mobile USA is now expressed in tangible terms. The equity share that DT will have in the merged entity allows it to participate in the U.S. market, while also providing it with a path to liquidate relatively easily. In other words, T-Mobile now has upside exposure in the United States, with no barriers to exit. AT&T’s main competitor, Verizon Communications Inc., as well as other, smaller competitors such as Sprint Nextel Corp., must now consider how to compete with AT&T Mobility’s profound size advantage.
In the United States, the deal raises concerns of anti-trust regulations, as consumer advocates rally against an AT&T/Verizon “duopoly.” If the deal passes, it will be because regulators bow to market pressure, accepting a trade-off between maintaining the number of competitors and other goals such as improving industry health and deploying pervasive mobile broadband. Regardless of opposition, a duopoly in the U.S. market is likely inevitable.
This raises the question of the implications of a U.S. duopoly on bandwidth scarcity and the exploding number of mobile devices. Verizon Wireless, AT&T Mobility and smaller players must think about how to deploy their scarce resources to minimize network congestion while improving the customer experience.
In the European telecom market, DT now regards cash flow, profitability and valuation as critical metrics, and is less concerned with growth. Going forward, DT will be enabled by its new flexibility; the company could pursue other deals focused on enhancing shareholder value. Additionally, the odds of more U.K.-style mergers involving national consolidation of DT subsidiaries abroad just increased. Long-term, DT will likely become a regional/national player, much like Japan’s NTT DoCoMo Inc., Korea’s SK Telecom or Italy’s Telecom Italia. Still big and still powerful, but not the global powerhouse it once aspired to be.
How will this sale affect the overall industry? As indicated in PRTM’s recent report, The Future of Telecommunications, AT&T’s buyout of T-Mobile reflects the growing importance of national depth over global reach, and underscores the fact that national consolidation is a powerful force in the industry. The sale of T-Mobile USA sets a new precedent: Four players may be too many for one market. The United States may soon find that three players are too many – if Sprint Nextel cannot turn itself around.
The deal marks a significant step in the evolution of the telecom industry. It accelerates the trend for in-market consolidation, pushes regulatory acceptance to the limit and brings the discipline of shareholder value creation to an industry that once prized subscriber growth and global reach over cash flow and shareholder return. DT – through this deal and the U.K. merger with Orange before – has chosen where it can best compete and decided to exit where it cannot. Expect many global empires to face the same difficult choice.
Ameet Shah is a Director in the Services, Electronics and Software business group at PRTM. Shah works with service providers, equipment manufacturers and software companies worldwide. His experience focuses on business and operational strategy, M&A, cost reduction and re-structuring, organizational design and change, product development management, operational improvement and customer experience. Prior to joining PRTM, Shah worked for Ericsson, GSM Association and Accenture. Shah holds an MA in Economics from the University of Cambridge (UK) and an MBA from the Wharton School of Business, University of Pennsylvania. He can be reached at ashah@prtm.com.
