The albatross that Deutsche Telekom AG thought it finally shed is back, heavier than ever.
Now that the $39 billion deal to sell its T-Mobile USA business to AT&T Inc. is off, the German telecommunications company is grappling again with the question that has vexed it for years: What to do with its troubled U.S. wireless business?
T-Mobile continues to bleed customers and revenue and is increasingly outmatched by larger competitors. But with the sale to AT&T no longer possible, the company faces obstacles to alternative fixes at every turn.
Deutsche Telekom's chief executive, René Obermann, conceded Tuesday that the company had no viable Plan B for T-Mobile ready to present to investors. For now, he said, the company had little choice but to continue to keep running a business it has spent more than a year trying to find a way to let go.
"Our first task is to operate the business the best we can with this new situation, and that's what we're going to do," Mr. Obermann told reporters. "Our task is to advance [T-Mobile's] business in the coming quarters, or years."
Doing so is likely to be difficult. Once Deutsche Telekom's profit engine, T-Mobile lacks the wireless spectrum needed to keep up with data-hungry mobile-phone users. Building a higher-speed network would also likely put Deutsche Telekom's traditionally high dividend at risk and trigger a revolt among investors.
Finding another way to exit the U.S. market appears equally daunting. The failed deal makes it much tougher to command a similar price from another suitor. Any tie-up with a direct rival, such as Sprint Nextel Corp., could run into the same antitrust problems that occurred with AT&T.
The 48-year-old Mr. Obermann, nevertheless, is under pressure from investors to design a new exit strategy sooner rather than later. An entrepreneur who dropped out of college to form his own telecommunications company, Mr. Obermann became the youngest person to run a German blue-chip company when he was appointed CEO in 2006. He was charged with finding new areas of growth as the former German telephone monopoly's traditional business slowed. But in Europe, revenue from the company's wireless and data services have been sluggish and finding a fix for T-Mobile has become a costly distraction.
Now, after arguing for the past year that Deutsche Telekom would be better off without its U.S. arm, Mr. Obermann must explain to shareholders why the company should keep investing in the declining business.
"They can't just turn around and say, 'This deal has failed so now we're going to pour a lot of money into the T-Mobile business,' " said Michiel Plakman, a fund manager with Robeco NV of Rotterdam, the Netherlands. If Mr. Obermann invests too much into T-Mobile, Mr. Plakman added, "he will be severely punished" by investors.
Mr. Obermann said in a separate interview Tuesday that he doesn't expect the amount Deutsche Telekom invests in the U.S. to increase significantly.
Analysts speculate T-Mobile might find a partner in the cable industry or with a smaller carrier, such as Leap Wireless International Inc. Another possibility is to eventually float T-Mobile in an initial public offering of stock.
As the fourth-largest U.S. wireless carrier, T-Mobile lacks scale in a crowded U.S. market increasingly dominated by AT&T and Verizon Wireless—a joint venture of Verizon Communications Inc. and Vodafone Group PLC—and it lags competitors in developing a next-generation network. It is also the only national carrier not to offer Apple Inc.'s iPhone, making it difficult to woo or keep more high-end subscribers.
T-Mobile's efforts to lure value-oriented customers to its plans, while successful, have generated less revenue. Through the first nine months of the year, T-Mobile lost 849,000 subscribers to its more lucrative contracts, and signed up only 825,000 customers to its lower-margin prepaid plans. As a result, its U.S. sales fell nearly 10% to €10.96 billion ($14.24 billion.
Deutsche Telekom will reap a $3 billion breakup fee and some spectrum rights from the collapse of the AT&T deal. But the consolation prize does little to improve T-Mobile's position.
Mr. Obermann said Deutsche Telekom will use the $3 billion toward its debt and that the additional spectrum helps, but isn't a complete solution for the company's wireless-capacity crunch. Analysts add that, by banking on the AT&T deal going through, the company lost out on recent auctions of what little spectrum T-Mobile might have been able to acquire—including Verizon's $3.6 billion purchase of spectrum this month from a cable consortium.
"T-Mobile USA is caught between a rock and a hard place," said Thomas Wehmeier, analyst with Informa PLC. "The $3 billion they get will feel like small change, compared to billions of dollars of investment that lie ahead," he added.
A big obstacle is Deutsche Telekom's commitment to a high dividend, one reason it has shied from investing more in T-Mobile USA. Investors—most notably the German government, Deutsche Telekom's largest shareholder—have come to expect a steady return to compensate for its slow growth, particularly in Europe.
For 2012, Telekom has agreed to pay out a dividend of at least 70 European cents a share.
"If there's no growth fantasy—because in this industry, growth is difficult—then the shares must have other benefits," Mr. Obermann said. "Long-term investors are interested in good dividends," Mr. Obermann said.
The German government, which still holds a 32% stake in Deutsche Telekom, also has made clear it would prefer that the company invest more in Germany and less elsewhere. In an interview before the deal's collapse, Axel Voss, a parliamentary aide and economic expert for Germany's ruling Christian Democratic Party, said the government favored the sale to AT&T because it would free up investment to increase broadband access in Germany, particularly in rural areas.
"When they have an international unit, they have to always pump in fresh investment to keep it running. That means there's a money transfer from Germany to America," he said. "We welcome all business decisions that allow for stronger investment in broadband in Germany."
The now-abandoned sale is also likely to have an unsettling effect on company morale. The employees and suppliers have been in limbo since the AT&T deal was struck in March, and its uncertainty has made it difficult for the company to negotiate with handset makers for the latest products, said Robin Bienenstock of Sanford C. Bernstein & Co.
In the previous two quarters, T-Mobile set aside $64 million in retention payments for key employees after the deal closed. Now without the deal, analysts added, T-Mobile might still need to deploy that cash to keep high-level executives from leaving.
read more: Olympus Wealth Management
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