Fitch: T-Mobile USA Deconsolidation Potentially Positive for Deutsche Telekom
Published on: 7th Jun 2014
The possible deconsolidation of T Mobile USA could be positive for Deutsche Telekom (DT), Fitch Ratings says. A severance would help DT group's leverage and would reduce the group's diversification. The ratings agency said that it believes that overall DT's operating profile would improve in view of the strategic challenges facing T Mobile USA.
The impact on DT's leverage post-deconsolidation would depend on the amount of deal proceeds (if any) applied to debt reduction, T-Mobile USA's and DT group's leverage at the time, and DT's ability to dispose of its holdings of T-Mobile's private bonds.
T-Mobile USA and Sprint were reported this week to be close to reaching an agreement on merging their businesses in the US. Even if DT, a 67% shareholder in T-Mobile USA, ends up with a minority stake in the merged operator, T-Mobile USA will be deconsolidated from its accounts.
T-Mobile USA's leverage including long-term financial obligations and deferred rents was 3.6x ND/EBITDA compared with DT group's 2.6x at end-2013, so deconsolidating this entity would seemingly be positive from the group perspective. However, USD5.6bn of T-Mobile USA's debt (or 30% of the total) was to parent DT. This internal debt is not reflected in the group's obligations because intra-group liabilities are excluded from consolidated numbers. Adjusting for this internal debt and taking into account only debt to third parties other than DT, T-Mobile's USA leverage would drop to 2.5x, nearly diluting the immediate benefit of deconsolidating it from DT's balance sheet.
In the medium-term the impact would depend on how quickly DT disposes of these instruments. So far, DT has halved its initial USD11.2bn holdings of T-Mobile USA's bonds selling USD5.6bn in October 2013.
Under Fitch's methodology, post-deconsolidation, T-Mobile USA's bonds held by DT will not be treated as cash equivalents, and will not be viewed as reducing DT's net debt. This item would be viewed as the group's investments in an entity with credit quality significantly inferior to that of DT.
A greater gain for DT's lease-adjusted FFO-based leverage metrics would be likely to be driven by a significant reduction in leases. DT reported EUR3.2bn of operating lease payments in 2013 with the US operations being the major contributor. Under Fitch's methodology leases were capitalised at 8x, leading to EUR25.6bn off-balance sheet debt, equal to more than half of DT's on-balance-sheet debt of EUR 48.9bn at end-2013.
Ownership of T-Mobile USA allows DT to diversify its revenues and earnings outside Europe. T-Mobile USA accounted for a significant 34% and 20% of DT group's net revenues and adjusted EBITDA, respectively, in 1Q14. However, we believe a local scale is more important in the telecoms business than global scale while the financial and operating synergies between T-Mobile USA and the rest of DT group are not obvious.
In view of strategic challenges facing T-Mobile USA in the US including its sub-scale position compared with its two much larger rivals AT&T and Verizon and a continuing need to invest in new spectrum including at the much expected 2015 auction, deconsolidation of this subsidiary would be beneficial for DT group's operating profile.