(April 22): Deutsche Telekom AG is considering a full combination with its American arm T-Mobile US Inc, a move that would create a multinational telecom group and rank as the largest-ever public M&A deal, people with knowledge of the matter said.
Deutsche Telekom is already T-Mobile’s biggest shareholder with a roughly 53% stake. The German carrier has been discussing the idea of creating a new holding company that would make a stock bid for shares of both Deutsche Telekom and T-Mobile, the people said, asking not to be identified because the information is private.
The potential deal would create a single, simplified corporate group that controls the operations of Deutsche Telekom and T-Mobile and would be jointly owned by the two companies’ current investors. The combined entity may then seek a listing in the US and a major European exchange, though the details are still being worked out, some of the people said.
Deutsche Telekom shares were 2% lower in early trading in Frankfurt Wednesday, giving the company a market value of about €138 billion (US$162 billion). T-Mobile fell 1.5% to US$195.39 in New York Tuesday, for a market capitalisation of about US$215 billion.
Discussions are at a preliminary stage and any transaction would require political support to move ahead, the people said. Details of the possible deal could also change. The companies have considered a closer tie-up on-and-off for years, and there’s no certainty they will decide to proceed this time, the people said.
“As per their usual practice, DT and TMUS do not comment on speculation regarding their corporate activity, nor are there specifics for us to comment on for your inquiry,” a spokesperson for Deutsche Telekom said in an emailed statement.
See also: HSBC is said to shortlist Allianz, Sumitomo for Singapore insurer — Bloomberg
Shares of Deutsche Telekom trade at well below the earnings multiple of T-Mobile, which contributes the bulk of its profits. Combining the two companies could reduce that valuation discount and give the merged group greater heft to potentially pursue acquisitions. It would also create the world’s biggest wireless operator by market capitalisation, surpassing China Mobile Ltd, which is valued at about $234 billion.
Deutsche Telekom entered the US market in 2001 when then-chief executive officer Ron Sommer bought T-Mobile predecessor VoiceStream Wireless in a deal that was criticised at the time for being too expensive. VoiceStream was later renamed T-Mobile USA.
Deal hurdles
See also: Hong Leong Asia pays $90.7 mil for household shelter supplier Yong Tai Loong
Any transaction may face significant obstacles, including the need for political support in Berlin and Washington. The German government and state-owned lender KfW own a combined stake of about 28% in Deutsche Telekom, giving them major sway in any deal.
In order to win approval, the companies may need to consider commitments to keep a major base in Germany and make significant investments in the US, some of the people said. It’s unclear if the German government would support a deal, as it would give them a smaller stake in the combined company. They’d also need to convince investors that the merits of creating a larger, multinational telecom group outweigh the benefits of having two separate, more focused companies that can attract investors interested in their specific market.
The new holding company would likely be incorporated in a European jurisdiction outside Germany, the people said. Companies have previously used a similar structure for cross-continental megadeals including US industrial gas giant Praxair Inc’s roughly US$35 billion combination with German rival Linde AG.
To effect that transaction, they created a holding company incorporated in Ireland — seen as a neutral middle ground — that made separate stock bids for Praxair and Linde. The merged group then listed on the New York Stock Exchange and Frankfurt bourse.
Hoettges warning
In a February podcast, Deutsche Telekom chief executive officer Tim Hoettges warned that European regulation is a major hurdle that’s preventing progress in building the continent’s digital infrastructure. He said that while Deutsche Telekom has become a global heavyweight, its market value is almost exclusively driven by its US business, highlighting the struggles of the European market.
The potential move also comes at a time of increasing tension between US President Donald Trump and European leaders like German Chancellor Friedrich Merz, who have been at loggerheads on issues from tariffs to the Nato alliance.
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
The European Union is working on new merger guidelines that would potentially ease the pathway for creating European champions big enough to compete with US and Chinese rivals. At the same time, many European companies have been looking at US acquisitions to tap the faster growth in that market.
Roger Entner, the founder of Recon Analytics, said T-Mobile is the reason Deutsche Telekom is the best-performing European telecom company. “They have always wanted to bring this in-house,” Entner said.
‘Nil-premium merger’
NewStreet Research analysts said in a note that a deal would give the companies “more optionality” to pursue potentially large acquisitions without diluting Deutsche Telekom.
“For that alone, we think this is a highly worthwhile deal for DT to consider, as it would give DT more future options in a consolidating market place where convergence could take any form over the next five-10 years.”
They added that they believe a deal would likely be a “nil-premium merger”.
Citigroup Inc analysts said they don’t immediately see obvious benefits for T-Mobile shareholders unless Deutsche Telekom offers a meaningful premium.
“The possibility of a merger scenario also raises the question as to whether or not DT would be willing to pay a significant premium to consolidate ownership, especially since DT could argue its non-US operations are already undervalued within the DT share price,” the analysts wrote.
Deutsche Telekom has been laying the groundwork for years to wield even more control over T-Mobile. Former Deutsche Telekom executive Srini Gopalan took over as chief executive officer of T-Mobile in November. Gopalan had been CEO of Deutsche Telekom Germany before joining T-Mobile as chief operating officer in March last year.
The company has expressed its desire to increase its T-Mobile stake, with Deutsche Telekom’s Hoettges saying earlier this year that the company was evaluating ways to further boost its holding.
Uploaded by Liza Shireen Koshy
