Deutsche Telekom lifts T-Mobile U.S. stake in SoftBank swap deal

By Douglas Busvine and Tim Kelly

BERLIN/TOKYO (Reuters) - Deutsche Telekom has struck a $7 billion share-swap deal with SoftBank Group to increase its stake in U.S. unit T-Mobile and sold its Dutch unit in a major shake-up that strengthens the German group's transatlantic focus.

As a result of the two deals announced on Tuesday, Deutsche Telekom will raise its stake in T-Mobile U.S. by 5.3% to 48.4%, bringing CEO Tim Hoettges closer to his goal of securing direct control over the $170 billion U.S. telecoms operator.

SoftBank will in return receive cash and a 4.5% stake in Deutsche Telekom, establishing a direct shareholding relationship after the Japanese group sold its U.S. Sprint unit to T-Mobile in a deal that closed in early 2020.

The latest transactions seek to lock down that deal by bringing Deutsche Telekom within touching distance of majority ownership over T-Mobile U.S. - which accounts for three-fifths of group sales and is its most profitable unit.

"This is a very attractive transaction for Deutsche Telekom and its shareholders to further benefit from the value creation potential in T-Mobile U.S. and beyond," Hoettges said.

As part of the complex transaction, Deutsche Telekom will trigger option agreements, enabling it to lock in an average price of $109 per share for the 65 million T-Mobile shares it is acquiring, below last week's closing price of $136.

Deutsche Telekom had options to lift its stake in T-Mobile U.S. above 50%, Hoettges told a briefing, either by exercising further options or sitting out the $60 billion in share buybacks that the U.S. company plans in the coming years.

Potential proceeds from a deal to sell its telecoms infrastructure unit, which is worth 15-20 billion euros $17.8-$23.7 billion), could also be deployed in pursuit of that goal as early as 2022, said one person close to the matter.

For SoftBank founder Masayoshi Son, the share swap deal substitutes a residual stake in the U.S. business for a strategic holding in Deutsche Telekom, which is also present in a dozen European countries.

"I'm a big believer that Deutsche Telekom stock has material upside," said SoftBank's chief operating officer, Marcel Claure, highlighting potential collaboration in areas such as digital payments, where SoftBank has broad exposure.

SoftBank has agreed not to sell its Deutsche Telekom shares before the end of 2024.

Shares in SoftBank, the world's biggest tech investor through its Vision Fund portfolio, rallied 10% on the news in Tokyo, while Deutsche Telekom erased initial gains to trade little changed.

DUTCH EXIT

Separately, Deutsche Telekom sold its Dutch unit T-Mobile Netherlands to a consortium of private equity houses Warburg Pincus and Apax for 5.1 billion euros ($6.1 billion).

Warburg Pincus' lead executive on the deal, Rene Obermann, a former Deutsche Telekom CEO, said he would support the unit's expansion of ultra-fast wireless internet by investing in people and next generation networks.

"The wireless revolution has only just begun," he said.

Deutsche Telekom acquired control of the Dutch business from Sweden's Tele2 in 2018 but never considered the unit, which ranked a distant third behind KPN and Vodafone Ziggo, as a core asset.

It will invest some of its 3.8 billion euros in proceeds from the Dutch deal to raise its stake in T-Mobile U.S. Tele2, which had retained a 25% stake in T-Mobile Netherlands, also sold out.

Following the Sprint deal, Deutsche Telekom had under a shareholder agreement held the right to cast votes on SoftBank's residual stake in T-Mobile U.S. It also struck option deals with SoftBank locking in the right to raise its stake in T-Mobile U.S.

Still, with Deutsche Telekom carrying a debt load of nearly 130 billion euros, the extent of its existing leverage meant it was always going to be hard to pay cash to gain majority control over T-Mobile U.S.

Under the share swap deal, Deutsche Telekom will issue 225 million new shares valued at 20 euros - 12% above their current market price - to SoftBank.

In return, SoftBank will sell around 45 million T-Mobile U.S. shares to Deutsche Telekom at an average price of $118 per share. Deutsche Telekom will buy a further 20 million shares in T-Mobile U.S. from SoftBank with $2.4 billion of the proceeds from the Dutch sale.

The average purchase price over the entire transaction, reflecting the premium on the share swap and the reinvestment of proceeds, works out at $109 per share, Deutsche Telekom said.

The sale of T-Mobile Netherlands followed a deal to sell Deutsche Telekom's Dutch telecom towers assets to Spanish infrastructure specialist Cellnex.

A similar deal for its main towers unit Deutsche Funkturm is one likely route to raising fresh funds, while a stake sale to an infrastructure investor or an initial public offering are further options, the person close to the matter said.

Hoettges reiterated Deutsche Telekom's medium-term guidance, updated at a recent capital markets day, that adjusted earnings per share would reach 1.75 euros in 2024 compared to 1.20 euros last year.

Goldman Sachs and Morgan Stanley advised Deutsche Telekom on the deal.

(Additional reportig by Arno Schuetze in Frankfurt, Toby Sterling in Amsterdam, Simon Johnson in Stockholm and Ritsuko Ando in Tokyo; Editing by Kim Coghill and Mark Potter)