Buy Deutsche Telekom to Profit From the Inevitable Sale of T-Mobile USA

By Jonathan Yates - September 14, 2012 | Tickers: AMZN, T, GOOG, SSNLF, S, TMUS.DL, VZ | 0 Comments

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With the doubling in share price of Sprint-Nextel (NYSE: S) this year, the worth of T-Mobile USA has not been reflected in the stock value of Deutsche Telekom, the owner of the company.  Year to date, Sprint-Nextel is up 107.26%.  That has not been the case with Deutsche Telekom.

Sprint-Nextel is the third largest wire carrier in the United States.  T-Mobile USA is the fourth.  But T-Mobile USA is profitable, while Sprint-Nextel is not.  In addition, T-Mobile USA has far better cash flow as Sprint-Nextel is larded down by debt.  For Sprint-Nextel, the debt-to-equity ratio is 2.30.

T-Mobile has more upside than Sprint-Nextel.  A major reason that T-Mobile USA has been losing subscribers is that it does not offer the iPhone.  As T-Mobile is moving to the 4G-LTE in 2013, that is easily remedied, particularly with the right buyer.  

Last year, AT&T (NYSE: T) attempted to buy T-Mobile USA for $39 billion.  But Sprint-Nextel fought back hard against the deal.  Sprint-Nextel won, which shows the value of T-Mobile USA, both in actual price and as a competitor.

There are any number of potential buyers for T-Mobile.  If Romney wins, there will be a more pro-business administration in The White House.  That could encourage AT&T to make another run after T-Mobile.  With improving earnings, Verizon Communications (NYSE: VZ) might make a bid now that it is in stronger position than it was when AT&T mounted its effort to acquire T-Mobile.  After Richard Nixon was elected president, the anti-trust lawsuit was dropped against IBM by the Department of Justice.  A change in power always results in a change in policy.  That could potentially entice Verizon Communications or AT&T again to pursue T-Mobile USA.

T-Mobile USA would be a savvy buy for a major mobile smartphone company.  AT&T and Verizon Communications are starting to rebel against the subsidy costs of moving high-end smartphones (T-Mobile USA would augment the hand of either, obviously).  Players in this sector such as Samsung and Google (NASDAQ: GOOG) are highly profitable and highly liquid.  Google just laid off thousands of employees from Motorola as it wants to focus on smartphones.  Acquiring T-Mobile would make Google much stronger in the smartphone group.

Samsung needs to make a major move as a research report from International Data Corporation predicts that its market share will plummet by 2016 (chart below).  To remedy this, according to Peter Misek, an analyst with the investment firm Jeffries, Samsung has been looking at Research-in-Motion and "...is still considering a BlackBerry 10 licensing deal."  The recent loss in court can hardly be considered bullish for the outlook of the company, either. Buying T-Mobile USA would greatly aggrandize Samsung's future in the smartphone sector.

Worldwide Smartphone OS Market 

Source: IDC Worldwide Mobile Phone Tracker, June 6, 2012

It is also widely reported that Amazon (NASDAQ: AMZN) will be coming out with a Kindle Smartphone.  With T-Mobile USA, Amazon would enter with a tremendous competitive advantage in a highly contested industry. T-Mobile would also enhance the other product offerings of Amazon such as the Kindle Fire 2.  It could also complement the same-day service feature that Amazon is expanding.  Amazon has a clean balance sheet with no debt and rising sales and earnings so financing a deal for T-Mobile USA should not be a problem.

T-Mobile USA is a very valuable asset that is not being treated the way it should by Deutsche Telekom, and that is reflected the share price.  Based in Bonn, Deutsche Telekom naturally focuses on the German market and other sectors in Europe.  T-Mobile USA has been starved of the needed funds to improve its customer service and infrastructure.  With the German economy slumping and seemingly headed towards a recession like the rest of Europe, it is very unlikely that any meaningful capital will be injected into T-Mobile USA by Deutsche Telekom.

Google, Amazon, Samsung and a host of others have more than enough cash to acquire T-Mobile; and the needed capital to vastly improve its operations.  Better customer service, its new unlimited data plan and the upgrade to the 4Ge-Lite should reverse the outflow of subscribers for T-Mobile USA.  

There should not be any anti-trust issues with bids from Google, Amazon or Samsung.  As each would no doubt invest to improve the offerings of T-Mobile USA, the industry would become more competitive, not less.  In addition, a new administration would be likely to be more amenable to these type transactions.

Deutsche Telekom would certainly gain from the sale of T-Mobile USA.  When the AT&T bid was made in March 2011, its share price rang in higher at around $15.40 from about $13.50.  Deustchse Telekom obviously wants to get rid of the asset; and based on the share price reaction, Wall Street obviously thinks it should.  

Now trading around $11.90, Deutsche Telekom has obviously given back the AT&T premium and much more.  The $39 billion that AT&T offered is pretty close to Deutsche Telekom's present market capitalization of around $50 billion.  With a price-to-earnings ratio of 70.69 and a dividend yield of 7.37%, Deutsche Telekom could certainly use the cash it would gain from selling T-Mobile USA.

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