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July 5, 2005
A Dilemma for T-Mobile: Invest Heavily or Cash Out
By MARK LANDLER and KEN BELSON

FRANKFURT, July 4 - To the extent that Deutsche Telekom has any sizzle, it
is supplied by its thriving American cellphone service, T-Mobile USA.

So why is Deutsche Telekom - Europe's largest and, recently, least
adventurous telecommunications provider - once again at the center of hot
rumors that it is thinking of selling the business?

It might be because T-Mobile has become a laggard, one that so far has held
up fairly well, but that now risks being dwarfed by its three giant
competitors - Cingular Wireless, Verizon Wireless and Sprint-Nextel.

However enthusiastic Deutsche Telekom professes to be about doing business
in the United States, the market has changed radically since 2001, when the
company bought T-Mobile USA's predecessors, VoiceStream Wireless and
Powertel, in 2001.

Considering the rapid consolidation among competitors and the rising cost of
upgrading networks with the latest technology, some analysts contend there
is now more incentive to cash out than there ever has been.

Fresh reports of a potential sale, the latest one in the Wall Street Journal
Europe, helped to push up Deutsche Telekom's share price here on Monday,
though the German company has steadfastly resisted previous calls by
analysts and shareholders to sell T-Mobile USA, which is its fastest-growing
asset.

"We have no comment about these reports," a Deutsche Telekom spokesman, Hans
Ehnert, said.

Then he reeled off a set of statistics about T-Mobile USA's robust growth:
it added 4 million new customers last year, bringing its subscriber base to
18.2 million.

Two larger rivals, Cingular and Verizon, however, each have more than twice
as many subscribers. And if T-Mobile USA wants to compete with them,
Deutsche Telekom would have to invest as much as $10 billion to upgrade the
T-Mobile USA network with so-called 3G technology, which offers high-speed
data exchanges and other advanced features.

That is a significant financial burden for a company that still shoulders
more than $40 billion in debt from an ill-advised global expansion. Under
its current chief executive, Kai-Uwe Ricke, Deutsche Telekom has been
whittling down its debt and sticking to its core business.

"If they do that, what would they then not have the money to do?" said John
Tysoe, founder of Mobile World, a telecommunications research firm in
London. "It's really a question of opportunity cost."

Deutsche Telekom has assembled a substantial wireless network in Central
Europe, with stakes in franchises in Poland and the Czech Republic. A sale
of T-Mobile, which could net between $25 billion and $30 billion, would give
it a formidable war chest for further European acquisitions.

In Britain, analysts speculate that Deutsche Telekom could make a bid for
O2, an independent cellular provider, which would buttress its weak position
there. Elsewhere in Europe, they acknowledge, the range of available
wireless assets is small and the prices are high.

Yet, the United States has its risks as well. Though T-Mobile USA is still
doing well there, its prospects are uncertain. It is growing at a reasonable
rate, but the company is a distant fourth after Cingular, Verizon and
Sprint-Nextel, which is expected to have its proposed merger approved before
the end of the year.

T-Mobile USA has successfully attracted price-conscious cellphone users in
major urban areas. But by focusing on this audience, it generates $10 to $15
less a month for each customer than do Sprint, Nextel and other carriers
that target corporate customers with high-speed data plans and other
expensive services.

Turnover among price-conscious customers is also typically higher than among
corporate users, which drives up marketing costs because companies have to
spend more to acquire new subscribers.

T-Mobile also lacks an affiliation with a fixed-line operator in the United
States. Cingular and Verizon, by contrast, are both owned in part by Bell
operating companies. Cingular is owned by SBC Communications and BellSouth,
while Verizon owns 55 percent of Verizon Wireless, and the rest is held by
Vodafone of Britain.

Affiliations with traditional phone companies mean their wireless services
can be sold at a discount as part of a bundle of services that include
fixed-line phones and broadband connections.

"The big three wireless companies are not the same as they were five years
ago," said Jeff Kagan, an independent telecommunications analyst. "They are
offering a range of new services, and they are not done yet. T-Mobile seems
to be standing still in an industry that's changing very rapidly."

In defending its decision to hold on to T-Mobile USA, Deutsche Telekom has
said it does not care if it is an also-ran.

"I'm not in the U.S. to own a Rolls-Royce," Mr. Ricke, Deutsche Telekom's
chief executive, said in an interview in May 2004. "I'm in the U.S. to get a
reasonable rate of return."

Mr. Ricke has said he would listen to offers for T-Mobile USA, but that he
believes there is no harm in waiting, since the price will only appreciate.
Deutsch Telekom's finances are sturdier now than they have been in years,
reducing the need for the company to make a deal to clean up its balance
sheet.

Deutsche Telekom spent $35 billion to acquire T-Mobile USA, then known as
VoiceStream, at the height of the frenzy over telecommunications assets in
2001. To recoup its investment, it would have to fetch at least that much -
a fact that makes some analysts skeptical of a deal.

Cingular paid $41 billion for AT&T Wireless, which was larger than T-Mobile
USA. Sprint and Nextel's deal was valued at $35 billion, but their
customers, brands, and arguably their networks, were more valuable than
T-Mobile USA's.

Many industry analysts say T-Mobile USA's assets might fit nicely with those
of other players, including Telefónica of Spain and, most notably, Vodafone
of Britain. Neither competitor controls its own network in the United
States, and both use similar G.S.M. network technology as T-Mobile USA,
which would make integration relatively easy.

Bankers have talked about Vodafone as an acquirer more frequently because it
is the world's largest cellphone company and positions itself as a global
carrier. If Vodafone acquired T-Mobile USA, it would be able to sell service
under its own brand name in the United States, something it cannot do as
part of its alliance with Verizon. Vodafone had this idea in mind when in
2004 it made an unsuccessful bid for AT&T Wireless, another G.S.M. provider.

"The reason you'd want to buy T-Mobile is exactly the same reason you'd want
to buy AT&T," said Mr. Tysoe of Mobile World. "You'd get your own network,
your own brand, using your own technology, in the world's most exciting
market."

Yet Vodafone has played down its interest in making a bid, which analysts
said may not be surprising, given that its shareholders pummeled it for
entering the bidding for AT&T Wireless.

As part of its agreement with Verizon, Vodafone also must dilute its stake
in Verizon Wireless before it could buy another American carrier. Verizon
has said it would be happy to take total control of its wireless unit. If
Verizon senses that Vodafone is in a rush to sell, it could hold out for a
better deal, analysts said.

A Verizon spokesman, Peter Thonis, had no comment on the possibility that
Vodafone might sell its stake in Verizon Wireless.

Then there is the issue of whether Deutsche Telekom would even sell to
Vodafone. The companies compete head to head in many markets, so if Deutsche
Telekom sold T-Mobile USA to Vodafone, it would in effect be assisting its
chief rival.

"Deutsche Telekom and Vodafone are archenemies," said Roger Entner, who
heads up the U.S. wireless division at Ovum, a telecom consulting firm.
"This would be worse than losing to England in soccer."
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Ken Belson contributed reporting from New York for this article, and Heather
Timmons from London.

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