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Deutsche Telekom buys U.S. mobile networks

Europe's top phone carrier Deutsche Telekom AG is spending $2.5 billion to accommodate the growth of its booming T-Mobile USA unit by buying networks from U.S. rival Cingular Wireless, it said on Tuesday.
/ Source: Reuters

Europe's top phone carrier Deutsche Telekom AG is spending $2.5 billion to accommodate the growth of its booming T-Mobile USA unit by buying networks from U.S. rival Cingular Wireless, it said on Tuesday.

In its biggest acquisition since it bought its U.S. mobile operator for $40 billion in 2001, Deutsche Telekom said it would unwind a joint venture with Cingular, buying out its erstwhile partner and taking over networks in California and Nevada.

The deal, subject to closure of Cingular's acquisition of AT&T Wireless and regulatory approval, brings much-needed capacity under the direct control of T-Mobile USA, the fifth-largest U.S. mobile operator.

"This network covers 40 million people and it's designed for both T-Mobile and Cingular," said a telecoms analyst at a major bank. "To build that from scratch would cost much money and time. I think the price very good."

T-Mobile USA, Telekom's most important growth engine, raised its customer growth forecast, saying it now expected to reach over 16 million clients by the end of 2004 and 30-35 million in the long term, up from 14.3 million at the end of March.

Chief Financial Officer Karl-Gerhard Eick, guardian of the group's 44.6 billion euros ($53.4 billion) in debt, said he did not expect the deal to have a negative impact on Deutsche Telekom's credit profile.

"Our financial headroom is not significantly changed by that," he said on the fringes of a news conference at the group's headquarters in Bonn.

Shares in the German firm dropped 1.2 percent to 13.27 euros by 0807 GMT, in line with Germany's blue-chip index DAX. They have shed some 7.5 percent so far this year, underperforming the DAX.

"This was a bare necessity," said Frank Rothauge, telecoms analyst at private German bank Sal. Oppenheim. "It's not a bargain, but T-Mobile doesn't have its own network in California and Nevada, so they did have to think about what to do."

T-Mobile USA and Cingular, owned by U.S. carriers Bell South and SBC, entered into their joint venture in 2001. At the time, it allowed both operators to quickly expand in areas where they did not have their own networks.

But Cingular's $41 billion takeover of AT&T Wireless means it now has enough network capacity on its own, while T-Mobile's rapid customer growth has increased usage of its own networks.

T-Mobile Chief Executive Rene Obermann said the group needed even more spectrum, or licenses to operate mobile telephony over regulated frequencies, and planned to buy $1 billion worth in both 2005 and 2006.

The unwinding of the joint venture, which needs approval of the U.S. Federal Communications Commission and the Department of Justice, is complex and some parts will take years to sort out.

T-Mobile will receive a one-off payment of $200 million, offsetting part of the $2.5 billion headline purchase price it is paying for Cingular's networks, Deutsche Telekom said.

The resulting net payment of $2.3 billion to Cingular is expected upon closure of the network purchase in early 2005.

On top of that, T-Mobile USA will buy spectrum from Cingular in parts of California for $180 million, with an option for more. Some spectrum in New York will return to Cingular, while ownership of the New York network will return to T-Mobile USA.

Cingular, on the other hand, will purchase network capacity from T-Mobile for $1.2 billion over a maximum of four years, which will result in extra earnings before interest, taxes, depreciation and amortization of $0.8 billion for Telekom.