BERLIN The U.S. block on Deutsche Telekom's $39 billion (24 billion pounds) sale of its U.S. unit throws CEO Rene Obermann's strategy into disarray and may force him to throw money at a business he thought he was rid of.
The announcement by the U.S. Department of Justice on Wednesday that it was suing to prevent AT&T Inc's purchase of T-Mobile USA caught Obermann and his management team by surprise. Company officials say they have no "Plan B," beyond fighting to keep the deal on track.
Should it collapse, as many analysts and bankers believe it will, sources close to the company say Deutsche Telekom would be faced with a stark choice: seek another buyer at a lower price, or hang onto it and invest 10s of billions of euros to restore its competitiveness.
Bleeding money and losing customers, T-Mobile USA ranks fourth among U.S. carriers behind AT&T, Verizon and Sprint.
"Without a deal, there's every chance T-Mobile will just cease to exist if you fast-forward three years," said an equities fund manager who holds both Deutsche Telekom and AT&T stock.
Analysts at Bernstein Research said the deal with AT&T was "all but dead in the water," so to avoid oblivion, Obermann has to invest.
That could mean he needs to cut the dividend of 70 euro cents per share after next year, several sources said. The dividend is a main draw for buyers of the firm's stock.
"No third party is going to step in, nobody will come in and take (T-Mobile USA) off Deutsche Telekom's hands," a senior source with close ties to the company told Reuters.
"Obermann did not supervise the U.S. business and completely left it on the side until it fell apart," the source added. "He got to the point where there was no other option but a fire sale."
The youngest CEO of a major German company when he took the helm of Bonn-based Deutsche Telekom in November 2006, Obermann was seen as a risk-averse manager until he surprised investors with the AT&T mega-deal in March.
Months after taking charge, he said his success should be measured by the company's share price. That has fallen from roughly 13 euros when he was appointed to below 9.
Despite the pressure on him, Obermann is likely to hang onto his job for now, sources predicted. The German government, which owns roughly a third of the company's shares, has little interest in pushing him out, so long as he refrains from major job cuts and maintains good relations with unions.
But the company's longer term future is less clear.
A second source, who advises Deutsche Telekom, said up to a year of haggling with U.S. authorities was likely, and that AT&T would have to sell "a lot" of assets to satisfy the U.S. Department of Justice and win approval for the deal.
Justice officials have said the deal, as it currently stands, would be disastrous for consumers, leading to higher prices, lower quality and less innovation.
"It will be a tough Hollywood-style fight about the remedies," the second source said. "The fallback options are all worse than Plan A, so they will fight for the original plan."
As part of the AT&T deal, Deutsche Telekom secured a breakup fee and benefits of $6 billion should regulators reject the deal. That gives the company some leeway in the short-term, but won't resolve its longer-term financial issues.
Deutsche Telekom had planned to use the proceeds from the sale to pay down debt, launch a 5 billion euro (4.4 billion pound) share buyback programme, and step up investments at home and in Europe. These plans are all at risk now.
FORMER CASH COW
Obermann inherited the U.S. business from former CEO Ron Sommer, who in 2000 bought what was then called Voicestream for $50 billion.
The move was much criticised at the time, but rebranded as T-Mobile USA, the business became a cash cow for Deutsche Telekom, before sputtering in recent years.
Looking for a boost, Obermann came close to buying U.S. rival Sprint in 2008, but backed off amid concerns the German government would not support a deal and worries about the compatibility of the two firms' network technology.
Ironically, the only company that might consider stepping into AT&T's shoes and purchasing T-Mobile would be Sprint, although technology issues would still make such a move difficult.
"Sprint is the only one left that can buy it," the first source said. "Sprint could put something low on the table, like $20 billion, with a deadline."
Should Obermann fail to find a new buyer, the choices are probably invest in the business or watch it wither.
"It flounders, succumbs to customer churn and potentially at a much lower valuation, someone like Carlos Slim might buy it and go for a value play," said Michael Kovacocy, an independent London-based telecommunications analyst. He was referring to the Mexican entrepreneur who Forbes magazine ranks as the world's richest man.
"From Deutsche Telekom's point of view (the AT&T deal) was almost a dream come true: someone was willing to pay a substantial premium to what T-Mobile would have been worth as a stand-alone."