DT begins shopping spree: Reported VoiceStream deal likely not the last purchase

Another week yielded yet another round of Deutsche Telekom rumors. For a change, however, these reports were not only about what the German telco might do but what it already has done - specifically, bid on VoiceStream, the almost-nationwide wireless provider based in Bellevue, Wash.

News of the reported offering - speculated to be for a price between $32 billion to more than $40 billion - surprised many analysts; most were expecting DT to make a splashier entrance into the U.S. While they offered myriad opinions about the motives behind the reported bid, all agreed on one aspect: Regardless of the outcome of the VoiceStream deal, DT's shopping spree for U.S. telecom interests will continue.

That's primarily because a VoiceStream buy would only provide a wireless entry and not a U.S. data IP conduit to serve customers globally, something DT officials acknowledge is their most pressing need after it and Sprint pulled out of the soured Global One relationship with France Telecom.

But data IP is just one of the "four pillars" cited in DT's business strategy. The others are consumer Internet, high-speed access and mobile services. And, for an overseas carrier wanting to enter the U.S. wireless market, VoiceStream would be an ideal acquisition.

Not only does VoiceStream offer an almost-nationwide footprint, its network uses GSM, the European-bred wireless air interface standard. This characteristic would allow a VoiceStream buyer such as DT - or France Telecom or NTT DoCoMo, two other potential suitors - to offer its wireless customers almost worldwide coverage with just one phone number.

Perhaps most important, VoiceStream may represent DT's path of least resistance into the U.S. Much-speculated deals with Sprint and Qwest Communications may not be possible because U.S. politicians are fighting to prevent government-owned telcos such as DT from owning U.S. licenses. As a relative small wireless-only provider, VoiceStream should create little regulatory friction if purchased by DT (see graphic).

The value of avoiding regulatory hassles should not be underestimated, said WorldCom CEO Bernard Ebbers, who recently saw his company's bid to buy Sprint undermined by regulators in the U.S. and Europe.

"I wouldn't be surprised if Deutsche Telekom tried to buy something. Buying a wireless company gives them the smallest regulatory hurdles they can get," Ebbers said during a speech at the Wireless Communications Association 2000 conference in New Orleans last week. Ebbers also noted that DT would face considerable regulatory opposition trying to buy a U.S. company in the local exchange business.

Indeed, a bill being proposed in the U.S. Senate would block a DT deal for Sprint or other U.S. telecom concerns. Calling it "chest thumping" by politicians, however, Dataquest analyst Ron Cowles said he does not believe the bill will be passed.

But avoiding government interference is particularly important for DT Chairman Ron Sommer, who is under pressure to make an acquisition after having several high-profile deals unravel during the last few years. Given this history, it is understandable that DT might be spooked by the U.S. senators' actions and refrain from trying to make the kind of blockbuster U.S. deal expected by the telecom industry, Cowles said.

For VoiceStream, being purchased by DT would legitimize its effort to become a top-tier player in the U.S. wireless market. DT has the resources necessary to allow VoiceStream to fill the holes in its footprint, either through buildout or acquisitions of smaller strategic carriers such Powertel, a GSM operator in the southeast.

Still, buying VoiceStream would leave DT with a significant data IP void. The German telco would have several ways to address this need, but all likely would generate considerable regulatory scrutiny.

If the company decides to address its data IP need in the U.S. in a piecemeal fashion similar to making its wireless play with VoiceStream, DT may be best served by buying a data competitive local exchange carrier such as Level 3 Communications or Global Crossing. This would fill the German company's immediate data IP void without attracting undue regulatory scrutiny because neither Level 3 nor Global Crossing owns U.S. local lines (see story on page 8). Global Crossing - which conducted talks with DT this spring - also is rumored to be selling its Web hosting assets, which would prevent DT from being caught in the U.S. governmental crossfire hampering NTT's effort to buy Verio.

Combined with a VoiceStream purchase, such a play would allow DT to address its two most important pillars while buying time that can be used to allay the fears of U.S. regulators while the German government continues to unload its shares of the telco.

This strategy would allow DT to make a much-expected blockbuster U.S. deal in the future, when it already has a U.S. foothold and might not have the government-ownership issue.

But many analysts believe DT still wants to make a blockbuster deal now, claiming that officials leaked its bid for VoiceStream as a high-stakes bluff to get Sprint - its real target, according to the theory - to the negotiating table. Indeed, Sprint and WorldCom formally called off their deal, which frees both companies to negotiate with potential suitors.

While WorldCom and DT have indicated interest in Sprint, their interests are different. WorldCom primarily wants Sprint's CDMA-based wireless operation, while DT is most enamored by Sprint's data IP and Internet holdings - the aspects of the WorldCom deal that bothered U.S. and European regulators.

Some analysts believe that Sprint should spin off its wireless holdings, which could be sold to WorldCom with little threat from regulators. If DT buys VoiceStream, it would not want Sprint PCS but might happily bid for the rest of Sprint - as might other suitors, including BellSouth.

It's a scenario that may represent the greatest hope for Sprint stockholders, who have watched the company's stock plummet recently as the company determines its direction.

"It's definitely an interesting idea," said Eric Kintz, analyst for Roland Berger & Partners. "If you could separate the entities somehow, you could maximize the price."

Cowles agreed. "The parts would be more valuable than the whole," he said.

Such a piecemeal selling strategy can be a gamble - if not executed properly, Sprint could find itself with an unfavorable collection of assets - but the company's choices are dwindling quickly, Cowles said.

"They really are in a Catch-22," Cowles said. "They've been taken to the alter and left. Now, they may be too big to be bought... and they're not of the nature to go out and buy something bigger the way WorldCom did. And I don't think the market would accept it, anyway; those days are probably over."

Another option for DT is Qwest Communications, which DT pursued in March before talks were squelched by Qwest's merger partner, U S West. With the Qwest/U S West merger complete, the two parties could enter freely into discussions, which likely would focus on Qwest's fiber optic network.