SoftBank’s T-Mobile Twist Shows Cash Isn’t King
(Bloomberg Opinion) -- SoftBank Group Corp. has finally got some relief. Shares in the hard-pressed Tokyo-based tech investment group jumped 10% on Tuesday after it agreed to sell a slice of its holding in T-Mobile US Inc. to Deutsche Telekom AG. On paper, the terms favor the German telecoms giant. But there are some notable giveaways to SoftBank too.
Deutsche Telekom already owns 43% of T-Mobile US and has an options contract with SoftBank that could potentially give it a majority holding in the wireless network. The question was when to start taking advantage of this. Now is clearly opportune.
The longer the German telecoms group waited, the greater the risk that T-Mobile US’s share price rallied, which would increase the cost of exercising some of the options. Meanwhile, SoftBank may have been more amenable to a deal. At the end of last week, its share price was down around 40% from its year-high amid concern about the value of its portfolio, including a jumbo holding in Chinese e-commerce group Alibaba Group Holding Ltd.
Deutsche Telekom will exercise options to acquire T-Mobile US stock, some at a fixed price, some a price tied to recent market levels. These average out at $118 per share, whereas the U.S. carrier closed on Friday at $136. What’s more, Deutsche Telekom isn’t paying in cash but in its own stock, valued as if it were worth 20 euros ($23.72). That’s above its market price as of Monday’s close. This plan prevents Deutsche Telekom from having to take on more debt, while the premium price means creating fewer shares than would otherwise be needed.
Finally, Deutsche Telekom will exercise further options for cash, funded by the sale of its Netherlands business to a private equity consortium. The net result of these moves is that it raises its stake in T-Mobile US to 48%, while effectively paying 20% less than the market price to do so.
One might have thought SoftBank would prefer a straightforward all-cash deal. But closing out much of the option contracts and replacing them with Deutsche Telekom stock still has benefits: SoftBank receives a 4.5% holding in a major European telecoms firm. As it says, this will serve as collateral for financing. Moreover, Deutsche Telekom stock has upside potential, whereas SoftBank would get the same value from its fixed-price T-Mobile US option agreements regardless of how high shares in the U.S. firm rose.
Plus there could be strategic benefits to being a major shareholder in Deutsche Telekom, such as joint marketing between SoftBank portfolio companies and its new partner’s customers. A potential board seat is in the offing.
Deutsche Telekom was widely expected to do something like this. Even so, the muted reaction of its shares suggests investors don’t entirely share management’s view that it was better to issue a stake to SoftBank than pay cash. The average analyst price target for Deutsche Telekom shares is nearly 22 euros, so the firm is still dishing out shares at a discount to where many outsiders see fair value, and the stock issuance will also slightly dilute earnings per share, as New Street Research notes.
On top, Deutsche Telekom has a new sizable shareholder in SoftBank and a strategic partnership that seems to have taken the market by surprise. That adds some complexity to the investment story. The German telecoms group raised its stake in T-Mobile US cheaply. But now it needs to demonstrate that this tie-up with SoftBank will really deliver.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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