TECHNOLOGY   |   FEBRUARY 4, 2010

T-Mobile USA's Owner Weighs IPO

By JEFFREY MCCRACKEN And DANA CIMILLUCA

The owner of T-Mobile USA, the fourth-largest U.S. wireless provider, is exploring an initial public offering or spinoff of the business, according to people familiar with the matter, as it seeks ways to jump-start the carrier and assuage disenchanted shareholders.

T-Mobile's parent, German giant Deutsche Telekom AG, has recently held discussions with a number of banks, including Deutsche Bank AG, about underwriting an IPO for the unit, according to people familiar with the matter.

Other options under consideration, these people said, include a partial spinoff of the business, which would carve it into a separate entity with its own balance sheet.

A merger with a U.S. rival is also on the table, though less likely, said these people, as it would face regulatory and technological hurdles.

A spokesman for Deutsche Telekom declined to comment.

Despite heavy marketing and high-profile devices such as the first Google Inc.-based cellphone, T-Mobile USA has failed to keep pace with rivals in recent years. With about 33 million customers and annual revenue of around $19 billion, T-Mobile USA has about 14% market share, leaving it far behind AT&T Inc., Verizon Wireless and Sprint Nextel Corp.

T-Mobile USA has languished under perceptions that its wireless network is inferior and lacks reach, analysts say, a major shortcoming as customers turn to their cellphones to surf the Internet and stream video. In the third quarter, it lost 77,000 customers.

For Deutsche Telekom, devising a strategy for the U.S. market has been a problem ever since it acquired the former VoiceStream Wireless for $35 billion in 2001 at the height of the telecom boom. Any move in the U.S. would come as the company has also announced plans to combine its struggling T-Mobile unit in the U.K. with a rival.

Deutsche Telekom is historically risk averse and the people familiar with the matter caution the company may ultimately decide against an IPO. Several years ago, the company began preparing an IPO for the entire T-Mobile unit, which includes wireless operators with 78 million customers across Europe. It ultimately quashed the plan.

Still, there is a feeling "the status quo isn't working for T-Mobile," said one person familiar with the matter.

Taking T-Mobile USA public would be a way to fund the build-out of the unit's network without relinquishing control.

Deutsche Telekom has told outsiders it will spend the next few weeks holding internal meetings about the fate of T-Mobile USA and come to a conclusion in the next two months.

Deutsche Telekom generated about €7 billion ($9.7 billion) in free cash flow last year. But its ability to fund T-Mobile's infrastructure is constrained because Deutsche Telekom is under pressure from its dominant shareholder, the German government, which controls about 30% of the company.

Should Deutsche Telekom go forward, the most likely scenario would be to sell about 20% of the division to investors and retain the rest, the people familiar with the matter said.

Based on an estimated earnings before interest taxes depreciations and amortization of $6 billion, T-Mobile USA would have an equity value around $20 billion and could handle about $12 billion or so in debt while maintaining an investment-grade rating, said people familiar with the matter.

Some proceeds could also be sent to shareholders such as Blackstone Group, which in 2006 spent $3.3 billion to acquire a 4.5% stake in Deutsche Telekom. Blackstone bought the shares for €14 each. Today those shares trade at €9.24, and down roughly 10% over the last year.

Deutsche Telekom late last year hired former Blackstone manager Thorsten Langheim to head up mergers and acquisitions. Mr. Langheim is heavily involved in the discussions over T-Mobile USA's fate.

T-Mobile's merger options are limited. As a buyer, T-Mobile's most digestible targets would be smaller carriers MetroPCS Communications Inc. and Leap Wireless International Inc., but both run on a different technology and would require a costly transition period.

As a seller, T-Mobile would find regulators an obstacle to an acquisition by AT&T or Verizon Wireless. A combination with Sprint would bring together three separate network technologies, when Sprint has already had trouble integrating two.

—Matthew Karnitschnig
and Roger Cheng
contributed to this article.

Write to Jeffrey McCracken at jeff.mccracken@wsj.com and Dana Cimilluca at dana.cimilluca@wsj.com