T-Mobile deal value likely to lag peers

T-Mobile USA would likely attract a much lower price tag than other wireless companies, if it goes on the block, according to wireless analysts. The No. 4 US mobile provider's parent, Deutsche Telekom AG expects to make a decision by year-end between putting T-Mobile USA up for sale or spending billions of dollars to expand the unit, according to recent reports.
T-Mobile USA would command a much smaller price than Nextel Communications Inc, which expects to be bought by Sprint for about $36 billion, and AT&T Wireless, which Cingular Wireless bought for $41 billion in October, says an analyst.
Some investors believe a T-Mobile USA suitor could pay as much as $30 billion, about eight times 2005 estimates for earnings before interest, tax, depreciation and amortisation or almost 7 times 2006 estimates.
"I think $30 billion is pushing the envelope," said Legg Mason analyst Chris King who sees $22 billion to $25 billion, or six times to almost seven times analyst estimates for 2005 EBITDA of $3.7 billion, as a more likely price for T-Mobile USA.
T-Mobile USA's valuation has to take into account its requirements for heavy investments in wireless airwaves and its relatively slim profit margins and customer cancellation rates that are among the highest in the industry, King said.
This would be a big factor for potential buyers, along with the necessity for T-Mobile USA to invest an estimated $10 billion in new airwaves and gear needed for a high-speed mobile network it would need to build to match rival services.
Analysts have also questioned whether Deutsche Telekom would be able to attract enough rival buyers to boost the price tag in an auction of the company.
"Whatever Deutsche Telekom decides to do with its US unit, it should address the fact that it will be less than half the size of Sprint Nextel," CreditSights analyst Ping Zhao said.
"If T-Mobile International doesn't care about margins, you could see them continuing to be independent," said Zhao.
She calculated T-Mobile USA's first quarter service costs, including the costs for backhaul wireline networks and wireless broadcast towers, as 23.9 percent of service revenue compared with Verizon Wireless' 14.8 percent costs.
As its rivals got bigger the company would come under more pressure to spend even more on its network, Zhao said.