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Fitch: Iliad T-Mobile USA Bid Increases DT's Strategic Options

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Iliad's offer to acquire Deutsche Telekom's (DT) stake in T Mobile USA expands DT's strategic options with regard to this stake. It is also evidence that overseas telecom operators are eying an entry into the US market, Fitch Ratings says.

The offer from France's Iliad signals that T-Mobile USA may be of strategic interest to companies that are not present in the US and would therefore not be able to extract any immediate synergies with other US operations. Iliad's offer is unlikely to lead to an outright bidding war, in Fitch Ratings opinion, as DT is likely to take into account strategic issues other than price, such as the benefits of owning a minority stake in the enlarged US operator.

But it suggests that a realistic option for DT would be to seek a buyer for this stake outside of the USA if a deal with a US operator does not go through. A deal with a foreign operator like Iliad would be less likely to face regulatory hindrances than a merger with a direct competitor active in the US market.

DT has been reported to be in talks with Sprint about the sale of T-Mobile USA. A Sprint/T-Mobile USA deal is likely to face severe regulatory scrutiny. Regulatory approval would be likely to require significant actions which may reduce potential synergies and valuations.

The sale of T-Mobile USA could be positive for DT.

A divestment may improve the group's leverage and operating profile in view of the continuing strategic challenges facing T-Mobile USA. The ultimate impact would depend on the amount of deal proceeds applied to debt reduction and DT's ability to dispose of its holdings of T-Mobile's private bonds. So far, DT has halved its initial USD11.2bn holding of T-Mobile USA's bonds, selling USD5.6bn in October 2013.

Fitch Ratings said that it believes DT's acquisition strategy may be reviewed should it sell the T-Mobile USA's stake. DT's lease-adjusted FFO-based leverage metrics would likely benefit by a significant reduction in leases after deconsolidation of T-Mobile USA. The US company accounts for a disproportionally large share of long-terms leases relative to its revenue, EBITDA and free cash flow contribution to DT group's consolidated accounts.

Under Fitch's methodology, DT's reported EUR3.2bn of operating lease payments in 2013 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.

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Tags: t-mobile usa  iliad  deutsche telekom  fitch ratings  USA