Apparently the $33 offer for T-Mobile (NASDAQ:TMUS) from Iliad (OTC:ILIAF) that was brushed off as "inadequate" is suddenly close to good enough. According to Bloomberg, Deutsche Telekom (OTCQX:DTEGY) has let it be known that an offer of $35 a share or more (why would anybody offer more?) is enough to snatch away the fourth largest wireless provider in the U.S. market.
The news smacks of desperation from the 67% owner of T-Mobile after Sprint (NYSE:S) pulled out from a proposal that was rumored near $40. With Sprint withdrawing after facing regulatory issues, Deutsche Telekom is left watching the value of the assets erode with Sprint embarking on a pricing war. The Bloomberg article though failed to discuss whether Deutsche Telekom is still focused on a deal for mostly cash so that it can exit the position. The cash requirement is a big issue for a potential suitor like Dish Networks (NASDAQ:DISH) that is already loaded with debt.
Not Paid To Wait
An investment in T-Mobile has quickly become a gamble. The company does have appealing assets, but the suddenly competitive domestic wireless market could erode away some of the value. Not to mention, any lack of financing to bid competitively in the upcoming spectrum auctions will seriously hamper future growth.
Partly due to the wireless pricing war, analysts are quickly ratcheting down the earnings estimates for next year. Only 30 days ago, T-Mobile was forecast to earn $1.11 in 2015. The number is now down to $0.96 and will probably take further hits.
With the stock trading around $30, one can easily see where the stock is attractive to buy for a quick gain if an offer for $35 or more reaches the desk of Deutsche Telekom. What happens if nobody shows up with an offer of that much?
Honestly, Dish Networks makes the most sense of the remaining options. The satellite provider could team up its pay-TV network with the wireless network of T-Mobile to offer a bundle that Sprint and Verizon won't have an offering to compete. Of course, AT&T (NYSE:T) is in the process of closing on a deal for DirecTV (DTV) questioning whether a combination of this nature could compete against the leaders in both categories.
For Dish Networks to consummate a deal for T-Mobile that would cost over $25 billion, some level of stock is probably a requirement. Dish already has $4.5 billion in net debt and would have to assume nearly $20 billion of debt from T-Mobile. How much more debt could Dish Networks add to complete the deal is a big question and a deterrent for a bid.
According to Moody's a few weeks back, the firm suggested several scenarios where Dish Networks would push the debt envelope on a deal for T-Mobile at $37. Now that we know that price would work, the big question is whether Deutsche Telekom would accept a deal with a significant amount of cash involved. Even with a deal of 50% stock and 50% cash, Moody's estimates leverage of the new company would equal 5.7x EBITDA. The other scenarios offered by Moody's involve buying only portions of the company including just the Deutsche Telekom stake for 70% cash. Moody's estimates the need to spend roughly $6 billion on the spectrum auction.
The fact that Deutsche Telekom made it known that an inadequate offer only a few weeks back is now close to acceptable smells of desperation. The pricing wars in the domestic wireless market can't be encouraging and a deal for T-Mobile at 35x 2015 earnings is probably more than adequate contrary to original proclamations. The recommendation is that risk averse investors hold onto T-Mobile for a quick offer that nets them $35, but the longer this lingers without news, the quicker the sell button should be hit.
Disclosure: The author is long DTV.
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