Deutsche Telekom Ponders
Sale of T-Mobile USA Unit

By JASON SINGER, DAVID PRINGLE and MATTHEW KARNITSCHNIG
Staff Reporters of THE WALL STREET JOURNAL
July 3, 2005 2:47 p.m.

Deutsche Telekom AG is grappling with a tough call: whether to sell its
T-Mobile USA cellphone operations, a move that could fetch about $30
billion and reshape mobile-phone markets on both sides of the Atlantic.

As the German telecommunications giant faces a huge bill to upgrade the
U.S. unit to keep pace with rivals, Deutsche Telekom's management board
has been debating T-Mobile USA's fate, according to people close to the
matter. The company has told investors recently it expects to make a
decision by December.

Choosing to sell the division, however, could prove to be a difficult
option. The most likely buyer, Vodafone Group PLC, says it isn't
interested even though the world's largest wireless carrier has long
wanted to control a service provider in the U.S. So far, Vodafone just
owns a 45% stake in Verizon Wireless. Verizon Communications Inc. owns
the rest.

Verizon Wireless has refused to use Vodafone's brand and uses a
different network technology than Vodafone, which makes it tricky to
roll out services that work in both the U.S. and Europe. T-Mobile USA,
by contrast, uses the same technology as Vodafone. Vodafone has tried
and failed to gain control of a U.S. carrier. Last year, it lost a
bidding war for AT&T Wireless Services Inc.

Bobby Leach, a spokesman for Vodafone, Newbury, England, says a purchase
of T-Mobile USA isn't in the cards for Vodafone. "We are not interested
in T-Mobile's U.S. assets," Mr. Leach says. "We have made clear our
commitment to the Verizon Wireless partnership." Mr. Leach declined to
comment further.

Analysts say Vodafone is likely to be wary of taking on a service
provider that trails far behind the three leaders in the U.S. market and
requires considerable investment.

Still, some top Deutsche Telekom executives have argued the company
should sell T-Mobile USA and use the proceeds to make acquisitions in
Europe instead of spending as much as $10 billion during the next few
years to build a faster network in the U.S. needed by T-Mobile USA to
keep pace with rivals offering high-speed wireless Internet access and
low-cost voice calls, according to people close the situation.
Acquisitions could fill out Deutsche Telekom's fixed-line, mobile,
Internet and other operations across Europe, including propping up its
ailing United Kingdom unit, they say.

T-Mobile USA's relatively weak position in the cut-throat U.S. market
has some investors rooting for Deutsche Telekom to sell. "From a
strategic position, I would rather have them exit the U.S. market,
especially when you are faced with this huge upgrade," said Theo Maas, a
fund manager with ABN Amro Asset Management in Amsterdam. Mr. Maas says
he is holding an "overweight" position in Deutsche Telekom in the hope
that it may sell in the U.S., but he declined to say how many shares ABN
holds. ABN Amro doesn't do investment-banking business for Deutsche Telekom.

Deutsche Telekom executives who are inclined to keep T-Mobile stress
that it is the company's fastest growing business, people close to this
group say. If Deutsche Telekom were to keep T-Mobile USA, based in
Seattle, the company could skip the upgrade investments and turn the
carrier into a discount operator.

Opponents to a sale also say that keeping the unit is wise because
potential acquisition targets in Europe are pricey and many are in
slow-growing markets, people close to them say. In addition, these
executives worry that following a sale of T-Mobile USA, shareholders
would pressure management to return that money to them. Germany's
cash-strapped government is the company's biggest shareholder and it
might push management to distribute the proceeds of a sale, which would
be between $25 billion and $30 billion, analysts say.

Deutsche Telekom's share price has languished for years and its
relationship with investors has often been contentious. Deutsche
Telekom's shares have fallen about 12% so far this year. On Friday,
Deutsche Telekom's shares rose 12 euro cents to close at €15.42 in
Frankfurt, while the firm's American depositary shares slipped 2 cents
to $18.40 on the New York Stock Exchange.

Another option that hasn't gained much attention inside the company is
the prospect of selling a minority stake in T-Mobile USA in an initial
public offering to raise money for the upgrade. That scenario would let
Deutsche Telekom retain control and compete in the U.S. But, Deutsche
Telekom just went through a messy delisting of its T-online subsidiary
in Germany, an experience that could turn it off another subsidiary IPO.

Deutsche Telekom acquired T-Mobile USA, then called Voicestream, at the
height of the telecom boom in 2001 for €39 billion (US$47.2 billion).
T-Mobile USA's revenue leapt 27% to €2.60 billion in the first quarter
of 2005 from a year earlier. That represents 18% of Deutsche Telekom's
total revenue of €14.28 billion during the quarter. Analysts at Credit
Suisse First Boston expect T-Mobile USA to generate €1.61 billion in
cash in 2005.

Meanwhile, Deutsche Telekom's European cellphone operations have
stagnated. In Germany, the firm's biggest European market, T-Mobile's
market share has declined as it focused on trying to improve margins.
During the first quarter, earnings were flat. In the U.K., enforced
price cuts by regulators and mounting competition on price from a unit
of Hutchison Whampoa Ltd., a Hong Kong conglomerate, as well as other
no-frills service providers is hurting T-Mobile UK.

But, with a market share of about 10%, T-Mobile USA remains dwarfed by
market leaders Verizon Wireless and Cingular Wireless. With T-Mobile
lacking the scale of those rivals, many analysts say Deutsche Telekom
will eventually need to sell.