Deutsche Telekom has struck a $7 billion share-swap deal with SoftBank Group to increase its stake in U.S. unit T-Mobile and sold its Dutch unit in a major shake-up that strengthens the German group’s transatlantic focus.
As a result of the two deals announced on Tuesday, Deutsche Telekom will raise its stake in T-Mobile US by 5.3% to 48.4%, bringing CEO Tim Hoettges closer to his goal of securing direct control over the $170 billion U.S. telecoms operator.
SoftBank will in return receive cash and a 4.5% stake in Deutsche Telekom, establishing a direct shareholding relationship after the Japanese group sold its U.S. Sprint unit to T-Mobile in a deal that closed in early 2020.
The latest transactions seek to lock down that deal by bringing Deutsche Telekom within touching distance of majority ownership over T-Mobile US – which accounts for three-fifths of group sales and is its most profitable unit.
“This is a very attractive transaction for Deutsche Telekom and its shareholders to further benefit from the value creation potential in T-Mobile US and beyond,” Hoettges said.
“But we are not just increasing our stake in T-Mobile US – we are welcoming SoftBank as a new key investor and strategic partner for Deutsche Telekom.”
As part of the complex transaction, Deutsche Telekom will trigger option agreements, enabling it to lock in an average price of $109 per share for the 65 million T-Mobile shares it is acquiring, below last week’s closing price of $136.
For SoftBank founder Masayoshi Son, the share swap deal substitutes a residual stake in the U.S. business for a strategic holding in Deutsche Telekom, which is also present in a dozen European countries.
SoftBank is trading T-Mobile shares whose value was pegged under the option deals for future upside in Deutsche Telekom shares that Marcel Claure, its lead executive on the deal, said were “significantly undervalued”.
“I’m a big believer that Deutsche Telekom stock has material upside,” Claure told a news briefing, also highlighting potential collaboration in areas such as digital payments, where SoftBank has broad exposure.
SoftBank has agreed not to sell its Deutsche Telekom shares before the end of 2024.
“We believe the deal value to Deutsche Telekom is advantageous,” said Jefferies analyst Ulrich Rathe, pointing to the 20% discount on T-Mobile shares.
Separately, Deutsche Telekom sold its Dutch unit T-Mobile Netherlands to a consortium of private equity houses Apax and Warburg Pincus for 5.1 billion euros ($6.1 billion).
Warburg Pincus’ lead executive on the deal is Rene Obermann, a former Deutsche Telekom CEO. Apax Partner Gabriele Cipparrone said it fit with its strategy of “investing in innovative companies with solid fundamentals and strong growth prospects.”
Deutsche Telekom acquired control of the Dutch business from Sweden’s Tele2 in 2018 but never considered the unit, which ranked a distant third behind KPN and Vodafone Ziggo, as a core asset.
It will invest some of its 3.8 billion euros in proceeds from the Dutch deal to raise its stake in T-Mobile US. Sweden’s Tele2, which had retained a 25% stake in T-Mobile Netherlands, also sold out.
Following the Sprint deal, Deutsche Telekom had under a shareholder agreement held the right to cast votes on SoftBank’s residual stake in T-Mobile US. It also struck option deals with SoftBank locking in the right to raise its stake in T-Mobile US.
Still, with Deutsche Telekom carrying a debt load of nearly 130 billion euros, the extent of its existing leverage meant it was always going to be hard to pay cash to gain majority control over T-Mobile US.
Under the share swap deal, Deutsche Telekom will issue 225 million new shares valued at 20 euros – 12% above their current market price – to SoftBank.
In return, SoftBank will sell around 45 million T-Mobile US shares to Deutsche Telekom at an average price of $118 per share. Deutsche Telekom will buy a further 20 million shares in T-Mobile US from SoftBank with $2.4 billion of the proceeds from the Dutch sale.
The average purchase price over the entire transaction, reflecting the premium on the share swap and the reinvestment of proceeds, works out at $109 per share, Deutsche Telekom said.
Hoettges said Deutsche Telekom had a wide range of options to lift its stake in T-Mobile US over 50%, for example by not participating in multibillion-dollar share buybacks planned by the U.S. company.
He reiterated Deutsche Telekom’s medium-term guidance, updated at a recent capital markets day, that adjusted earnings per share would reach 1.75 euros in 2024 compared to 1.20 euros last year.