How Deutsche Telekom and T-Mobile US could pull off the world's biggest M&A deal

[LONDON/BERLIN] Deutsche Telekom is exploring a possible tie-up with T-Mobile US to create a US$300 billion telecoms giant, sources said, in what would overtake Vodafone-Mannesmann’s US$203 billion merger in 1999 to become the biggest M&A deal ever.

The German group already controls 53 per cent of the US unit. But a deal would potentially bring both companies under one entity in a bid to reignite growth in a stagnating telecoms sector, according to a person familiar with the situation and Bloomberg, which was first to report the talks on Wednesday (Apr 22).

A merger would provide scale to compete in both the US and Europe but could also face structural, geopolitical and regulatory challenges, analysts and one industry source said.

Deutsche Telekom and T-Mobile US declined a Reuters request for comment.

How might a deal be structured?

Under one possible scenario, a new holding company would make an all-share offer for both firms. It would be owned by existing shareholders and list in both the US and Europe, the person said.

Such a structure would mirror the US$80 billion merger between German gas supplier Linde and US rival Praxair, analysts at MKI Global Partners said in a note.

In that 2018 deal, the two firms combined through an all-stock merger of equals under a newly created Irish holding company, Linde. Praxair shareholders had their shares converted into shares of the new entity, while Linde shareholders were offered an exchange of their shares for new Linde shares. At the time of the deal the shares of the new holding company were listed in both New York and Frankfurt.

What are the potential benefits for Deutsche Telekom?

Deutsche Telekom CEO Timotheus Hoettges had said during full-year results in February that the company was reviewing opportunities to increase its stake in T-Mobile US.

The industrial rationale for the merger would be to increase the group’s overall sum-of-the-parts valuation, given that its US business trades at a significantly higher multiple to Deutsche Telekom, one industry banker and analysts said.

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T-Mobile US shares trade at eight times earnings before interest, tax, depreciation and amortisation (Ebitda) compared with just 4.4 times Ebitda after leases for Deutsche Telekom, Morgan Stanley analysts said in a note.

Still, analysts cautioned that a larger single group could still trade at a discount relative to pure US players, something that has persisted across several European telecoms groups. Deutsche Telekom and T-Mobile shares both fell some 4 per cent on news of the possible merger.

Synergies in a combination would be minimal, Morgan Stanley analysts said, adding that the main advantages would be greater scale and simplification, giving the group capacity to pursue more M&A deals.

Deutsche Bank agreed a combined structure could provide more efficient access to capital to fund M&A in Europe and the US. Morgan Stanley added that a larger telecom could defend against rising competition, satellite operators offering Internet access, and the need, largely in the US, to offer fixed mobile convergent products.

What approvals would be needed?

Any capital raise would require support from 75 per cent of Deutsche Telekom shareholders and cannot happen without sign-off from Berlin, said Thomas Nienaber of MKI Global Partners. Between the German Ministry of Finance and government-owned KfW, the state controls 28.3 per cent.

He added that T-Mobile US shareholders may have little incentive to swap shares into a German-US company at a low premium.

Given the deal’s size – the transaction would create the world’s largest wireless services company – analysts at New Street Research said it would trigger so-called Hart-Scott-Rodino thresholds, and the US Department of Justice Antitrust Division could review it.

The analysts said it would also require Federal Communications Commission approval, which involves a statutory foreign ownership issue, and may also need the approval of the Committee of Foreign Investment in the US.

“We don’t see competition, security, or regulatory issues leading the government to block the deal, but there are significant political issues that might have to be addressed in the deal review,” they said. REUTERS