Wireless Wars

Rebuffed in Selling T-Mobile USA, Deutsche Telekom Boss Attacks Regulator

Deutsche Telekom CEO Timotheus Höttges at the phone company's May 15, 2014, annual shareholders meeting in Cologne, Germany. Source DPA
Deutsche Telekom CEO Timotheus Höttges was angered by a U.S. regulator's decision to block the sale of T-Mobile US.
  • Why it matters

    Why it matters

    Though T-Mobile U.S. is currently a source of growth, Deutsche Telekom sees its American subsidiary as intrinsically disadvantaged as a small player against telecommunication giants AT&T and Verizon.

  • Facts

    Facts

    • Deutsche Telekom has long hoped to unload its U.S. unit.
    • Sprint and T-Mobile U.S. are the third- and fourth-largest wireless service providers in the United States, far behind Verizon and AT&T.
    • But T-Mobile U.S. added 908,000 monthly customers in the second quarter of this year.
  • Audio

    Audio

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Timotheus Höttges, Deutsche Telekom’s chief executive, has never been a great friend of regulatory watchdogs. He feels restrained by them and restricted in how he makes business decisions. Recent developments in the United States have likely only confirmed this distrust.

On Thursday, he asked a provocative question: “What are the regulatory authorities trying to communicate?” This was just 36 hours after Sprint, the third largest U.S. mobile network provider, had retracted its multi-billion dollar offer for T-Mobile U.S., a subsidiary of Germany’s Deutsche Telekom.

The reason is the same as in 2011, when a similar deal with the American giant AT&T fell through. U.S. antitrust regulators led by Tom Wheeler, chairman of the Federal Communications Commission, insist on having four players in the U.S. wireless market. A merger between Sprint and T-Mobile U.S. would have left just three – but it would have presented Deutsche Telekom with the exit from America that it has long sought.

“If the regulator wants to have four providers, I want favorable terms for the smaller companies to encourage competition”

Tim Höttges, Deutsche Telekom CEO

Its T-Mobile U.S. subsidiary is currently shaking up the local market: it plans to add two million new subscribers to its 50-million customer base this year. But Mr. Höttges considers AT&T and Verizon to be miles ahead of the domestic competition, claiming the “David versus Goliath” scenario requires U.S. authorities to compensate for market disadvantages. Specifically, if Deutsche Telekom is being forced to stay in the United States, he wants concessions from regulators for the expensive spectrum auctions beginning in 2015.

“If the regulator wants to have four providers, I want favorable terms for the smaller companies to encourage competition,” he said.

In the absence of alternatives, Mr. Höttges now aims to stay in the United States with T-Mobile, at least for now. He dismissed the $15-billion offer last week by discount French telecommunications company Iliad as unacceptable. Increased value for shareholders would be the decisive factor in any sale.

“We have not yet received such an offer,” he said.

Iliad can still sweeten its bid, perhaps by joining forces with partners like the U.S. satellite provider Dish. Mr. Höttges is considering other options and claims to be relaxed about the future of his American subsidiary. “I have learned that the mergers and acquisitions market is unpredictable,” he said. Mr. Höttges especially doesn’t want the timing of such a move imposed on him.

Industry experts like Wolfgang Specht of the German private bank Bankhaus Lampe assume that Deutsche Telekom will stay in the U.S. market for now. “Höttges will wait and see if a new door opens in two or three years,” he said.

But Mr. Specht expects T-Mobile’s chief executive, John Legere, to approach advertising campaigns less aggressively given the future costs for new frequency blocks totaling billions of dollars. “He won’t be able to sustain an aggressive marketing strategy in the long run,” he said.

 

Sprint CEO Daniel R. Hesse in 2012. Source
Sprint CEO Daniel R. Hesse testifying before a U.S. congressional committee in 2012. Source: Getty Images

 

Mr. Höttges himself does not feel pressured. He believes his one-time American problem child has turned itself around in recent years. In fact, the unit is currently one of Deutsche Telekom’s main drivers of growth.

T-Mobile U.S. is not merely adding millions of new customers. Its 15 percent increase in revenues in the United States meant that Deutsche Telekom’s earnings as a whole remained stable at €15 billion for the second quarter. Other divisions were either reorganizing (like the IT subsidiary T-Systems), suffering from effects of a weak economy and regulatory intervention in Europe or having to fight in a strongly competitive environment like in Germany.

Cost savings in Deutsche Telekom’s home market have led to a small increase in the operating profits despite slightly declining sales. The profit margin is now 41.3 percent, double that of its U.S. subsidiary.

Mr. Höttges and his chief financial officer, Thomas Dannenfeldt, are particularly happy with the mobile phone business. Despite hefty competition, the market leader has been able to further expand its share.

And he couldn’t resist a dig at his strongest rival, the British multinational telecommunications firm Vodafone.

“Vodafone currently only has one answer – to cut prices,” Mr. Höttges said. “I think that’s a sign of weakness.”

Martin Wocher can be reached at: wocher@handelsblatt.com

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