Growth without scale: Deutsche Telekom’s T-Mobile headache

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FRANKFURT (Reuters) – The collapse of the attempt by T-Mobile US to merge with Sprint Corp will underline its importance as a driver of growth when its main owner, Deutsche Telekom, reports quarterly results this week.

A T-Mobile shop is pictured in San Ysidro, San Diego, California, U.S., October 26, 2017. REUTERS/Mike Blake

T-Mobile, under charismatic CEO John Legere, keeps hitting home runs, already reporting it that added 1.3 million net customers in the third quarter – the 18th time in a row it has achieved the feat.

T-Mobile reported revenues in the third quarter that topped $10 billion for the first time, up 8 percent.

The picture for Deutsche Telekom group on Thursday is likely to be different, with analysts on average forecasting group revenues of 18.4 billion euros ($21.4 billion) – a year-on-year gain of just 1.6 percent.

That would reflect barely positive growth in Telekom’s crowded and heavily regulated home market, where sales rose just 0.4 percent in the first half, and at its European holdings that were ahead by just 1.5 percent.

Deutsche Telekom, which has toyed with options for its U.S. business for years, put a brave face on the unraveling of the deal on Saturday night, saying T-Mobile would continue its successful growth strategy.

“We supported our American subsidiary to invest more than $40 billion over the last years, thus building a basis for strong growth in the upcoming years,” CEO Tim Hoettges said.


But some investors wonder whether the best years may now be behind T-Mobile, whose shares have risen ninefold from the low they hit after the global financial crisis to a peak of $68 in June.

“I’d just love them to sell it,” one UK-based fund manager who holds Deutsche Telekom stock said last week as reports surfaced that the T-Mobile-Sprint talks were in trouble.

At T-Mobile’s latest share price, Deutsche Telekom’s 64 percent stake would be worth $31 billion.

“There’s a tendency to run things for ever, sometimes, and then you end up selling at the wrong times,” the fund manager added.

Together, T-Mobile and Sprint would have had about 130 million customers, putting a merged entity a close third in the United States behind market leaders AT&T and Verizon.

Alone, T-Mobile has 70.7 million customers, requiring a lot more good quarters to close the gap on its own.

Lacking sufficient scale and running a mobile-first strategy, T-Mobile may face challenges if Sprint, controlled by Japan’s Softbank Group, revives its efforts to hook up with a U.S. cable firm, according to a top-10 Telekom shareholder.

An approach by Softbank chief Masayoshi Son was rebuffed in July by Charter Communications.

($1 = 0.8615 euros)

Additional reporting by Simon Jessop; Writing by Douglas Busvine; Editing by Edmund Blair

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