Activist Investor urges Deutsche Telekom to drop huge merger with T-Mobile US
Elliott Investment Management wants Deutsche Bank to hike its stock price via a large stock buy back, not by merging with T-Mobile US.
Investment firm wants Deutsche Telekom to forget about T-Mobile merger | Image by T-Mobile
A record-setting merger between T-Mobile US and its largest stockholder, Deutsche Telekom, was being discussed back in April. As noted at the time, such a transaction would result in the largest public Merger & Acquisition (M&A) deal in history.
Combining Deutsche Telekom and T-Mobile would create the world's most valuable carrier
Additionally, a Deutsche Telekom-T-Mobile US combination would create the world's most valuable wireless carrier based on market capitalization. The current leader is China Mobile with a valuation of approximately $224 billion and the merger between the German and American carriers would create
Back in April, we told you that the plan called for the creation of a new holding company that would offer Deutsche Telekom and T-Mobile stockholders shares of the holding company in exchange for their T-Mobile US and Deutsche Telekom shares. The German government would surely have a say in what the final version of the deal looks like. You see, the German government and state-owned lender KfW collectively own 28% of Deutsche Telekom allowing them to have a say in whether a deal gets done.
In July, T-Mobile US executives supposedly informed Deutsche Telekom that they were no longer going to support the deal due to opposition from major stockholders and concerns from CFIUS (Committee on Foreign Investment in the United States) that if a merger was completed, Deutsche Telekom could force T-Mobile to redirect T-Mobile's hefty US revenue to its European operations.
Activist investment firm enters the scene
Regulators in the US have hinted that for a deal to get done, they would want a guarantee that T-Mobile's profits would be re-invested domestically to fund T-Mobile's infrastructure in the States and 5G expansion. Things became more complex when activist investor Elliott Investment Management (I like to imagine ET's voice saying the name when I type it) built a stake in Deutsche Telekom.
What should Deutsche Telekom do to boost its valuation?
3 Votes
According to Bloomberg, Elliott wants the German carrier to drop any plans it has to combine with T-Mobile US and consider alternative ways to generate more stockholder value. One possibility would be for Deutsche Telekom to announce larger stock buybacks.
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Deutsche Telekom's CEO seeks to reduce a valuation gap
Elliott's stance is in direct opposition to Deutsche Telekom Chief Executive Officer Tim Hoettges who wants to close a valuation gap between T-Mobile US and its parent company. Right now, T-Mobile's price-earnings ratio is 19. That means that the US-based carrier's stock trades at 19 times the company's earnings per share. Deutsche Telekom trades with a price-earnings ratio of just under 16 and it is this difference in valuation that the executives in Germany want to wipe out.
Besides the valuation gap, Deutsche Telekom's shares are penalized for having to deal with heavy regulations that impact European telecom firms. In addition, the German carrier gets a valuation penalty for being T-Mobile's parent company. By combining the two firms into a single holding company listed in both the US and Europe, the parent-subsidiary discount is eliminated and European investors get to have their investment valued at the higher "American" price-earnings ratio belonging to T-Mobile.
By combining Deutsche Telekom and T-Mobile into one $300 billion holding company, it locks in the German firm's permanent control over T-Mobile US and creates a giant telecom company able to outscale Verizon, AT&T, and China Mobile.
Elliott Investment Group has yet to reveal its stake in the German carrier
Elliott has yet to disclose its stake in Deutsche Telekom, which, under German rules, it must do after acquiring a 3% or higher stake in the company.
What activist investor Elliott Management does. | Image by Elliott Management
This is a business where bigger is better. Creating a super-carrier means that the combined Deutsche Telekom-T-Mobile will be able to borrow money at lower interest rates, and pay less to access the capital markets.
Over the last year, T-Mobile's shares have declined 28.18% while Deutsche Telekom has declined 11.69% over the same period. This seems to indicate that the market is already reducing the valuation gap even without any merger being announced.
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