Germans Send a $26.5 Billion Thank You Card to Masayoshi Son

(Bloomberg) -- Sometimes it pays to be left waiting at the altar.

Tim Hoettges, Deutsche Telekom AG's CEO, may be thinking as much today. Almost four years after Softbank's Sprint Corp. backed out of acquiring T-Mobile U.S. Inc., the German carrier's American subsidiary turned the tables on Sunday, agreeing to buy Sprint for $26.5 billion in stock.

Back in 2014, Sprint was offering its then smaller rival a cash and stock deal which valued T-Mobile's equity at about $31 billion, and would have seen Deutsche Telekom get a 15 percent stake in the new company. Under the new terms, Telekom retains 42 percent.

It's testament to T-Mobile's maverick boss John Legere and his management team. Legere has been a pest to AT&T Inc. and Verizon Communications Inc., using any opportunity to skewer the telco giants. His shooting from the hip is backed by a healthy business performance too. In the year of the initial failed deal, the company had 55 million subscribers and reported a net loss. It now boasts 73 million subscribers, and posted a $2.1 billion profit in 2017.

The turnaround has been critical for parent Telekom, owner of 62 percent of T-Mobile. In the Legere years, the unit has become its biggest source of revenue growth, as earnings have stagnated in Europe. Because it will also have proxy control over Masayoshi Son-controlled SoftBank's 27 percent stake in the new entity, it can continue to consolidate earnings into its own income statement.

The deal, if it secures regulatory approval (a big “if,” as my colleague Tara Lachapelle points out), also buttresses T-Mobile against the risk of being acquired. I say risk because, as much as Deutsche Telekom shareholders would have loved to get a big chunk of cash from any divestment, the unit has been a boon to Hoettges.

Had Sprint not abandoned its first attempt because of anticipated regulatory opposition, Hoettges would probably have endured a far more challenging tenure at Telekom after taking over at the start of 2014. He would have had more cash, but it's hard to find an asset in the industry that has enjoyed T-Mobile's 9.3 percent annual growth since then. If a third party such as Comcast Corp. had swooped in with an offer too good to refuse, Hoettges would have struggled to find another investment to match it.

Risks remain, of course. Telekom's debt ratio will swell beyond its target range. My colleagues at Bloomberg Intelligence say leverage could rise from 2.3 times to nearer 3 times. Sprint had $36.9 billion of total debt at the end of last year, according to Bloomberg data.

And management has to execute on the stated annual synergies goal of $6 billion. T-Mobile's profit margins have lagged those of its parent, so investors will want to see a lasting improvement. Still, Legere and his Chief Operating Officer Mike Sievert have done well in lifting things so far, so they've earned their chance.

Antitrust objections are going to be hard to ignore, but if they can pull off this union, the dowry might be substantial.

To contact the author of this story: Alex Webb in London at awebb25@bloomberg.net.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.

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