Win some, lose some

DT/VoiceStream helped on Capitol Hill, hammered in stock market After apparently surviving a political battle on Capitol Hill for the acquisition of VoiceStream Wireless, which is expected to pave the way for regulatory approval, Deutsche Telekom's greatest opposition may come from an unexpected source: VoiceStream's stockholders.

A precipitous decline in DT's stock is a source of concern for many shareholders of the Bellevue, Wash.-based wireless company. Originally valued at $55.7 billion based on DT's stock price in July, the drop in the German telco's stock means that the deal is worth 30% less to VoiceStream investors.

If DT's average stock price falls below 33 euros on the Frankfurt exchange for seven random days selected during a 15-day window immediately prior to the deal closing, VoiceStream stockholders can renegotiate the terms or nix the merger, said a DT spokesman. In that scenario, VoiceStream would keep the $5 billion in cash provided by DT last month in exchange for a 10% stake in the company.

DT's stock price in Frankfurt was 35.98 euros last Thursday - down from about 60 euros when the VoiceStream purchase was announced - but it is the stock price immediately prior to the deal's expected closing in the first half of 2001 that could trigger changes.

If DT's stock falls below 33 euros, several large VoiceStream investors reportedly believe that selling the company for less than 15% more than its current market valuation makes no sense when the GSM operator is so coveted by foreign carriers such as NTT DoCoMo and France Telecom.

"NTT announces every day that they want to get into the U.S.," said Eric Kintz, analyst for Roland Berger & Partners.

However, whether there is a better deal available is questionable. NTT DoCoMo is not yet allowed to sell stock as part of an acquisition, making it impossible for it to purchase outright a wireless concern such as VoiceStream. And France Telecom faces many of the same problems as DT.

Analysts and DT officials blamed the decline in the telco's stock price on several factors, including the high cost of universal mobile telecommunications system licenses in Europe, the high price being paid for VoiceStream and increased competition in the German market.

Ironically, concern about DT's stock came on the heels of good news from Capitol Hill, where legislative efforts to block the VoiceStream merger appear to have lost momentum. In fact, a unique coalition of the U.S. Chamber of Commerce, the AFL-CIO and the Communications Workers of America jointly opposed legislation proposed by Sen. Ernest Hollings, D-S.C., that would prevent the FCC from considering the deal.

Federal law prohibits companies that are more than 25% owned by foreign governments - DT is 58% owned by the German government - from buying U.S. telecom licenses. However, the FCC can waive the stipulation if it deems the deal to be in the public interest. Hollings' proposals would have prevented the FCC from using this waiver power.

A source close to VoiceStream said the deal "is not totally out of the [political] woods yet" but acknowledged that the "unprecedented alliance" of unions and business bodes well for the company's efforts on Capitol Hill.

But the opposition of the unions and the chamber will not cause the legislation to fail; instead, the joint press conference served as public recognition that Hollings' proposals would not become law, said Rudy Baca, global strategist for The Precursor Group.

"Basically, these people were late to the wake," he said. "It says to me that they realized the death knell had already sounded and that it was safe to take their privately held positions public."

Hollings has argued that government-owned companies such as DT essentially can "print money," giving them an unfair advantage if allowed to compete against private U.S. telecom firms. Hollings' critics have noted that blocking the DT/VoiceStream deal on the grounds of government ownership would be considered a violation of the World Trade Organization agreement to deregulate the telecom industry worldwide - an effort led by the U.S. in 1997.

Meanwhile, the German government in the last month agreed to further open its telecom market by lowering interconnection rates and announced its intention to completely divest its interest in the telco.

Given the chamber's history of support for free trade, its opposition to Hollings' proposals was expected. That the unions took a similar position was surprising to many observers, especially in light of the union lobby against trade with China. But CWA President Morton Bahr said DT would be a welcome addition to the U.S. corporate structure.

Bahr and other American union officials would like to replicate DT's close relationship with German unions in the U.S., Baca said.

"I think they want to build on the very strong unions in Germany to unionize the so-called New Economy shops. That's the battleground."