AT&T is so determined to surpass Verizon Wireless that it’s willing to pay double its own valuation for the only US wireless operator losing customers.
AT&T agreed to buy T-Mobile USA on March 20 for $39 billion in cash and stock and create the largest US mobile-phone company, valuing Deutsche Telekom’s unit at 28.8 times earnings, according to data compiled by Bloomberg. AT&T, which fell 31 per cent even after it began exclusively carrying Apple’s iPhone in June 2007, now trades at 13 times profit, while Verizon Communications commands a multiple of 16.3. T-Mobile’s valuation was also higher than any cellular phone company outside Hong Kong and China, the data show.
Chief Executive Officer Randall Stephenson, 50, is betting that adding T-Mobile USA’s 34 million customers and wireless spectrum will boost sales and reduce dropped calls after losing exclusive rights to the iPhone. The Dallas-based company is spending what Deutsche Telekom’s finance chief called an “enormous” price that avoids taking on T-Mobile USA’s $15.9 billion of debt and may ward off other suitors. The deal still faces regulatory hurdles and a $3 billion breakup fee if it falls apart.
“Is T-Mobile that much more valuable? I doubt it,” said Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania. “It’s a struggling company. If AT&T has to sell big chunks of the thing to make it work, it doesn’t make sense. If they can’t complete the deal, they’ve got to turn over $3 billion.”
High-speed wireless
Shares of AT&T rose 1.2 per cent to $28.26 yesterday after announcing the deal that will help expand the rollout of its high-speed wireless technology. Deutsche Telekom jumped 11 per cent to ¤10.67 yesterday after it sold the unit for more than analysts projected. The Bonn-based company advanced 0.6 per cent to ¤10.73 today.
AT&T and T-Mobile USA combined would control 39 per cent of the US mobile-phone market, surpassing Verizon Wireless, which has 31 per cent, according to data compiled by research firms EMarketer and ComScore.
The transaction will give AT&T new airwaves for its planned high-speed, fourth-generation network that will cover 95 per cent of the US, John Stankey, president of AT&T Business Solutions, said on a conference call yesterday. AT&T and T-Mobile in the US both use the GSM standard to deliver mobile phone and data service, making the integration easier, he said. The combined company will also be able to cut costs in retail, advertising and overhead.
“The market seems to be liking the deal,” said E William Stone, who oversees about $105 billion as chief investment strategist in Philadelphia for PNC Wealth Management, which owns shares of AT&T. The company believes they can “take a lot of costs out of it,” he said.
AT&T will be able to increase average revenue per user by selling more data-heavy smartphones to T-Mobile USA customers.