D.Telekom finds good route to poor destination

Deutsche Telekom has found a smart route to a questionable destination. The 85 billion euro German carrier is raising its stake in its T-Mobile US subsidiary by 5%, at a cost of roughly $8 billion. Doing so via a share-swap with SoftBank Group saves having to hand over all of that in cash. The bigger question is whether Chief Executive Tim Hoettges should be upping his holding in the first place.

When all the dust has settled from Tuesday’s flurry of activity, SoftBank will own 4.5% of Deutsche Telekom, making Masayoshi Son’s group its biggest investor after the German government. Meanwhile, Deutsche Telekom will hold 48% of T-Mobile, putting it within a whisker of the majority ownership that Hoettges craves.

The good news for Deutsche Telekom shareholders is that, overall, they are getting the T-Mobile shares at a near-20% discount to the current market price, thanks to favourable call options on SoftBank’s approximate 8% holding in the U.S. carrier, a legacy of its acquisition of SoftBank-owned Sprint last year. The other good news is that Hoettges is paying for the bulk of this in shares, rather than cash, despite netting a tidy 3.8 billion euros from offloading Deutsche Telekom’s Dutch unit, T-Mobile Netherlands, to private equity houses Apax and Warburg Pincus.

Still, a 10% jump in SoftBank shares versus a small dip in Deutsche Telekom’s suggests Son’s investors are happier to have mostly removed their derivatives commitments. Meanwhile, Deutsche Telekom shareholders have tended to value T-Mobile at a discount to what it should be worth. On the basis that Hoettges’s European empire is valued in line with regional rival Vodafone, it would have a 94 billion euro enterprise value.

Lop that off the group’s 281 billion euro worth, which on Citi figures includes debt, pensions and minority interests, and there’s 187 billion euros left for T-Mobile. Deducting the latter’s net debt reveals an equity value of $150 billion, compared to its actual market value of $170 billion.

To get to his 50% threshold, Hoettges needs to buy shares worth $2.7 billion at current prices, and has all but exhausted his supply of juicy options. While he has found a nicely discounted way to execute his latest deal, its shine will be removed if his investors continue to mark down the value of stateside forays.

Context news
– Deutsche Telekom said on Sept. 7 it had sold its T-Mobile Netherlands unit to a private equity consortium and struck a share-swap deal with SoftBank Group that will allow it to raise its stake in American unit T-Mobile US to close to 50%.

– Under the deal, Deutsche Telekom will increase its stake in the U.S. carrier by 5.3% to 48.4% by receiving 45 million shares from SoftBank at an average price of $118 under the share-swap arrangement, and by buying a further 20 million shares in cash at an average of $109 each.

– Meanwhile, SoftBank will receive 225 million new shares in Deutsche Telekom, valued at 20 euros per share, a 12% premium to their Monday close. That will give SoftBank a 4.5% stake in Deutsche Telekom, making it the company’s number two shareholder behind the German government.

– In a separate agreement, private equity funds Apax Partners and Warburg Pincus agreed to buy T-Mobile Netherlands for 5.1 billion euros, including debt. Deutsche Telekom said it would net 3.8 billion euros from the disposal.

– Deutsche Telekom shares were trading at 18.20 euros as of 0823 GMT on Sept. 7, up 1.1%. SoftBank shares were at 6,943 yen, up 9.9%. Reuters