Sale of T-Mobile by Deutsche Telecom appears doomed, giving competitors an edge (T, DTEGY & VOD)

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The $39 billion sale of Deutsche Telecom AG's (DTEGY) T-Mobile unit to AT&T (T) has moved from "deep jeopardy" to now "likely to fail" according to The Wall Street Journal , with competitors such as Vodafone (VOD) likely to benefit.

This development is a long-term strategic impediment for Deutsche Telecom AG, no doubt, but faltering confidence in German credit markets make it worse. This was detailed in " Bad German bond sale highlights need for Fed banks stress test ," on . The Bundesbank, the central bank of Germany, had to purchase $3 billion of the bonds due to the lack of interest from other parties. This was, very appropriately, termed a "disaster" by one observer.

"Disaster" might be likely applied to the inability of Deutsche Telecom (DTEGY) to sell T-Mobile to At&T (T) and the resultant impact on the stock price, which will be negative. As it is, Deutche Telecom AG (DTEGY) has been doing little to make T-Mobile succeed. This is manifested in that T-Mobile has lost 850,000 subscribers this year. The fact that Deutsche Telecom is willing to sell T-Mobile is another obvious sign that it has factored the unit out of its long-term planning. Compeition among wireless carriers is very expensive and very intense now and has been likened to that of the coal wars of the 1990s, by one analyst.

Deutsche Telecom's long-term outlook would certainly benefit from the $39 billion it would have received from AT&T (T) for T-Mobile, certainly. At $11.60, Deutsche Telecom AG (DTEGY) is trading near its year low of $10.70. In addition, with a market cap of around $50 billion, the proceeds from the sale of T-Mobile would do much to bolster the balance sheet. This is desperately needed as the margins and rerutns of Deutsche Telecom are anemic with a high dividend that diverts cash flow from operations.

Opposition from the Department of Justice and the Federal Trade Commission may kill the deal, according to The Wall Street Journal article, "AT&T's T-Mobile Deal Teeters," by Anton Troianovski, Greg Bensinger and Amy Schatz. If so, a beneficiary would be Britain's Vodafone (VOD). Deutsche Telecom is barely profitable, with a profit margin of just over 5%. Its price-to-earnings ratio is over 250, as opposed to less than 12 for Vodafone (VOD). The average price-to-earnings ratio for a stock on the Standard & Poor's 500 Index is around 20. DTEGY generates a return on assets under 2%. With earnings per share of around 5 cents and 4 billion share outstanding, even the $4 billion kill fee it will receive from AT&T (T) is the deal does not go through will represent about 20 times earnings for the year for Deutsche Telecom AG (DTEGY).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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