Deutsche Telekom US Network Capex Of EUR2.1 Billion

Published on: 7th October 2006

NEW YORK -(Dow Jones)- T-Mobile USA expects to spend about EUR2.1 billion ($2.66 billion) over the next two to three years to upgrade to a next-generation network.

In a press release early Friday, the company said it expects to begin the rollout of the third-generation, or 3G, network in the fourth quarter and believes it will be complete in 2008. Commercial availability is planned for mid-2007.

The network is armed with ample wireless spectrum licenses won from the latest Federal Communications Commission auction, in which T-Mobile USA spent $4.2 billion. It will use the UMTS network standard. "The planned capex is a lot of money, but they have to do it to stay in the game," says Gartner Group Inc. analyst Tole Hart. "A UMTS network brings extra capacity, so it makes sense for voice services, though data services are more wait and see," says Hart. Gartner does not rate stock.

Deutsche Telekom is keen to expand in the U.S., where it is the smallest of four major mobile network operators, because mobile services there still offer growth - in stark contrast to the mature European mobile markets.

"Beyond preparing well - we also think we acquired new spectrum at just the right time," T-Mobile USA Chief Executive Robert Dotson said in a statement. "The fact is the timing of the 3G service adoption aligns perfectly with our primary consumer target."

The past two years of industry consolidation led to a disparity between the bigger wireless carriers and T-Mobile, Dotson said. He added he believes the auction puts it on equal footing with the other players.

Gartner's Hart does expect T-Mobile to be able to compete on the basis of the new spectrum. "They may have some holes, but they have most of the territory covered," he says. However, he adds that gaining new subscribers is getting more difficult.

Deutsche Telekom said Friday that it aims have 35 million to 40 million customers in the U.S. by 2015, up from around 23 million today. Deutsche Telekom Chief Executive Kai-Uwe Ricke said he expects the unit to generate 25% of its total sales in 2010 and wants to capture 18% to 20% share of the USA. In the first half of this year, T-Mobile USA's sales share reached 22%.

T-Mobile U.S.'s new profitability goal should be reached in five to eight years, with the EBITDA margin, or earnings before interest, taxes depreciations and amortization, to reach at least 35%, according to Deutsche Telekom Chief Financial Officer Karl-Gerhard Eick. The unit's current EBITDA margin stands at around 29%.

T-Mobile hopes to minimize the increase in spending by rolling over existing network investments toward the 3G upgrade. As a result, it expects the total cost of the spectrum acquisition and construction of the new network to be at the lower end of analysts' expectations before the auction. The carrier will upgrade to a 3G network similar to the one Cingular is using called Universal Mobile Telecommunications System, or UMTS.

Wireless carriers are rushing to build out 3G networks because they offer faster mobile connections, enabling better video, music and other services. T-Mobile, which is the No. 4 player in the industry, lags behind leaders Cingular Wireless, jointly owned by AT&T and BellSouth; Verizon Wireless, jointly owned by Verizon Communications and Vodafone Group; and Sprint Nextel in building out a 3G network.

Dotson said T-Mobile will use its 3G network to allow customers to integrate personal video and audio clips, focus on displacing fixed telephone lines, take computers mobile, broaden the mobile email market, and adopt social networks such as News Corp.'s MySpace and privately held YouTube.

T-Mobile also said the results of the auction would not alter Deutsche Telekom's revenue and profit forecasts for 2006 and 2007.

Deutsche Telekom recently shocked the market with a surprise profit warning.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com

(Ouida Taaffe in London and Stefan Paul Mechnig contributed to this article.)

(END) Dow Jones Newswires"

 

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