Deutsche Telekom AG executives found themselves justifying the price the German company paid for Voice-Stream Wireless Corp. as it detailed the new deal to analysts last week.
“The price is fair,” said Kai-Uwe Ricke, chief executive officer of T-Mobil International, DT’s mobile carrier arm. “Traditional subscriber and cash flow are not applicable because VoiceStream is in too early of a stage for this to be meaningful with other transactions. DT is paying a favorable price per pop when compared with recent transactions.”
When the companies announced the deal on July 24, it was valued at $50.7 billion, or $195.75 per VoiceStream share, assuming 265 million fully diluted shares. The price tag dipped all week as DT investors showed their concern over price. However, shares recovered somewhat by RCR press time, valuing the deal at around $50.6 billion, or $190.80 per VoiceStream share.
According to the agreement, VoiceStream shareholders will receive 3.2 DT shares and $30 in cash for each share of Voice-Stream common stock. Voice-Stream stockholders will be able to make an all-stock or all-cash election, subject to proration. DT also will assume about $5 billion in VoiceStream net debt, the companies said.
DT also will make a separate cash investment of $5 billion in VoiceStream in exchange for a preferred stock convertible into common stock at a price of $160 per share. The investment will allow VoiceStream to bid in upcoming U.S. spectrum auctions, accelerate its nationwide buildout efforts and upgrade its network.
DT told investors to value the deal based on potential customers VoiceStream will have. With VoiceStream’s 2.3 million subscribers at the end of April, DT is paying roughly $12,000 per subscriber, significantly more than what it paid for U.K. operator One 2 One.
“When we bought One 2 One last year, there were a number of statements that we overpaid,” said Ricke. “Today, looking back nine months, the price paid is more than reasonable. I am confident that this transaction will be recognized that way.”
It’s been a difficult road for DT Chairman Ron Sommer, who has unsuccessfully tried to link with the likes of Telecom Italia and Qwest Communications International Inc. DT’s global strategy is taking longer than investors have wanted. The company had to make some aggressive moves in the United States.
“The U.S. market is critical in terms of size and growth,” Sommer told analysts. “(The acquisition) takes us into the right market, the most attractive wireless market in the world, at exactly the right time. We expect a period of explosive growth with mobile data services.”
Indeed, VoiceStream has pronounced itself the fastest-growing wireless company in the nation. It believes it captured approximately 30 percent of the incremental subscribers in an average six-player market during the first quarter. The company has yet to release second-quarter results. Still, VoiceStream has many markets to build and spectrum to buy to fill in the holes.
When the deal, which has no collars on price, was announced, it translated into roughly $255 per pop, comparable to valuations of other national carriers, said Robinson-Humphrey Co. Nextel Communications Inc. is valued at around $276 per pop and Sprint PCS at $259 per pop.
DT described VoiceStream as the cornerstone to its global strategy. The two carriers, both using GSM technology, will be able to provide global roaming pricing packages, unified billing and customer service worldwide. VoiceStream will become part of T-Mobil. VoiceStream senior management will lead DT’s U.S. mobile operations, continuing to use the VoiceStream brand.
VoiceStream management waived options that would have vested their VoiceStream stock once the merger is accepted by shareholders, demonstrating they will stay with the company. Voice-Stream Chairman and CEO John Stanton and his wife will own about 20 million DT shares.
The transaction, expected to be completed early next year, is subject to regulatory approvals. The U.S. government already is concerned about the transaction since the German government holds a majority stake in DT.
Legislation Sen. Ernest Hollings (D-S.C.) has proposed to block purchases of U.S. telecom carriers by foreign-government-owned telecom firms has gained momentum. It was attached to a Federal Communications Commission spending bill earlier this month.
If this legislation becomes law this fall, DT and other foreign telecom companies may find it difficult to buy into U.S. wireless carriers.
Hollings said mergers driven by foreign-government-owned telecom firms raise national security issues and are anti-competitive.
Both companies began heavy lobbying on Capitol Hill last week, confident regulators in the United States and Europe will look at globalization as a two-way street, said Sommer. Once the merger is complete the German government would lower its stake in DT from 58 percent to about 46 percent.
Sommer also voiced his frustration with many European countries that have not liberalized and opened their markets as much as Germany has. DT’s focus is on gaining entrance into France, Spain and Italy. Last week it won a UMTS license in the Netherlands and recently purchased more properties in Eastern Europe.
“We would like to see a level playing field in Europe,” Sommer said. “The realization of globalization will not take place overnight … We will try to do what is right at the right time for our shareholders.”
