It was no surprise. Powertel Inc., one of the last major U.S. regional carriers, will fold operations with VoiceStream Wireless Corp. Germany’s Deutsche Telekom AG, which weeks ago announced plans to buy VoiceStream, has agreed to purchase Powertel for around $5.89 billion.
Analysts speculated on the acquisition for years. Powertel holds vital markets in the Southeast, and those markets will fill in VoiceStream’s holes without any overlap problems.
DT and Powertel have entered into an arrangement that gives Powertel shareholders 2.64 DT shares for each share of Powertel common stock, subject to certain adjustments. Based on the closing price of DT ordinary shares on the Frankfurt Stock Exchange Aug. 25 of $39.98 per share, each share of Powertel common stock would have a potential value of $105.36, the companies said.
The DT/Powertel acquisition is expected to close immediately after the DT/VoiceStream acquisition closes. If the deal between Voice
Stream and DT does not consummate, holders of Powertel common and preferred stock will receive VoiceStream common shares at a conversion ratio ranging from 0.65 if the average closing price of VoiceStream common stock is $130.77 or above and 0.75 if the average closing price of VoiceStream common stock is $113.33 or below. Between these two points, the ratio adjusts to yield $85 in VoiceStream common stock for each share of Powertel common stock equivalent.
Once the transaction is complete, VoiceStream will hold 250 million licensed pops and 120 million covered pops across the nation. The addition of Powertel’s largest market, Atlanta, will give VoiceStream a presence in 24 of the top 25 markets, said VoiceStream Chairman and CEO John Stanton. Voice
Stream does not offer service in San Diego, the nation’s 25th largest market.
The carrier will use a $5 billion investment from DT to bid on 40 million to 60 million pops in the upcoming re-auction of C- and F-block licenses. When the re-auction will begin is unclear. The Federal Communications Commission last month postponed the auction from its planned Nov. 29 date. It has yet to set another date.
Powertel’s stock fell on the merger news, and analysts believed it was in sympathy to DT’s and Voice
Stream declining stock. DT’s $50 billion price tag for VoiceStream doesn’t sit well with DT investors. They believe the German operator is paying too much for Voice
Stream. However, DT insists VoiceStream must be valued on its growth potential rather than traditional subscriber growth and cash flow because of its young operating experience. DT paid roughly $16,000 for each VoiceStream customer and is paying more than double Powertel’s market capitalization, around $8,000 per Powertel customer.
Analysts believe DT’s stock, which has fallen 20 percent since its merger announcement with Voice-Stream, also is affected by third-generation licensing issues in Europe. Many major wireless carriers have seen a drop in their stocks as they spend billions on UMTS licenses. DT is spending $14 billion for licenses in the United Kingdom, Netherlands and Germany.
“There are currency, telecom and 3G licensing issues going on with DT’s stock price,” said Stanton. “We think as they do a better job over time of articulating their vision, DT’s stock will perform better, and we, Powertel and VoiceStream, get to ride along.”
It’s been a tough 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 has taken longer than investors wanted. The company had to make some aggressive moves in the United States, but now investors have concerns over whether DT can build itself into a global operator.
During the company’s quarterly conference call with analysts, Sommer said that DT would concentrate on integrating its acquisitions and spurring growth. Chief Financial Officer Karl-Gerhard Eick has indicated DT’s stock is dramatically undervalued and plans a long road trip in September to campaign.
“It will be my main task in the coming weeks and months to create new confidence in the share,” he told a German newspaper. “Instead of the usual two weeks, I shall be on the road for four weeks. We will fight to raise the share price.”
DT reported a fourfold increase in half-year profit. Net profit for the first six months totaled $3.87 billion, up from $856 million last year. The results, however, included recent purchases such as One 2 One in the United Kingdom. Excluding those acquisitions, net income dropped to $630 million because of falling sales in the company’s fixed-line business and the high cost of attracting wireless customers.
DT faces another hurdle-proposed U.S. legislation that would block purchases of U.S. companies by foreign-government-owned companies. The German government owns 58 percent of DT today and will dilute its interest to about 45 percent once DT acquires VoiceStream. The Powertel acquisition will dilute the government’s share by another 1 percent.
The legislation, proposed by Sen. Ernest Hollings (D-S.C.), was attached to an FCC spending bill in July and could become law by the fall. Though Congress has been out of session in August, VoiceStream executives have spent the last month talking with members of Congress in their home districts as well as at the Republican and Democratic conventions, Stanton said. Stanton is scheduled to testify at a subcommittee hearing on Thursday about the matter.
“We fully expect the transaction to close,” said Stanton. “Every member (of Congress) will have the opportunity to look at the transaction. There’s so much consolidation in the United States that it has reduced competition. Powertel and VoiceStream have no overlaps, and our scale will allow us to be more aggressive. For us, competing against a business like Verizon, which is eight times our size in terms of customers, it’s important to bring a strong partner that can bring in capital to the business.”
