Deutsche Telekom raises stake in T-Mobile US, swaps shares with Softbank

Deutsche Telekom (DT) announced moves to increase its ownership in T-Mobile US towards the goal of a majority stake, including an equity swap deal with SoftBank that makes the Japanese firm a 4.5% shareholder in DT.

Through a series of actions, including issuing DT shares to SoftBank and using cash proceeds from the sale of its T-Mobile Netherlands unit (also disclosed Tuesday), Germany’s DT is upping its stake in T-Mobile US from 43.2% to 48.4%. The move marks progress on the operator's previously stated plan to gain a majority holding in T-Mobile U.S.

“This is a very attractive transaction for Deutsche Telekom and its shareholders to further benefit from the value creation potential in T-Mobile US and beyond,” said Timotheus Höttges, CEO of Deutsche Telekom, in a statement. “But we are not just increasing our stake in T-Mobile US – we are welcoming SoftBank as a new key investor and strategic partner for Deutsche Telekom. I am thrilled by the value creation potential of this cooperation for both SoftBank and Deutsche Telekom."

It increases the number of DT-owned T-Mobile shares by 65 million, up from 539 million today to 604 million, according to New Street Research.

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Most of the deal shares (45 million) come from the swap with SoftBank, while 20 million are being acquired from the Japanese conglomerate with cash – about $2.4 billion – from DT’s sale of T-Mobile Netherlands to private equity firms Warburg Pincus and Apax.

New Street said DT’s more than 48% share could get diluted back down if T-Mobile’s stock reaches above $150 per share and Softbank exercises certain options.  

“DT though still has options over a further 56m TMUS shares (7m fixed price at $101, 29m floating price option from Softbank and the remaining 20m call option from a financial institution),” wrote New Street’s James Ratzer. “This would equate to a 4.3% diluted stake, which would still [give] them the ability to guarantee a majority stake in TMUS.”

SoftBank, as the former parent of Sprint, got its stake in T-Mobile when the two U.S. carriers successfully completed their merger in 2020. As part of the Sprint sale to T-Mobile, DT secured voting rights over SoftBank’s 8.5% share.

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DT has already made clear it wants to have majority ownership of the U.S. operator, which has been pushing its challenger position and is the No. 2 wireless provider in the country by subscribers. T-Mobile has deployed a nationwide 5G network, using both low-band 600 MHz and key mid-band spectrum with a trove of 2.5 GHz assets. 

“This is a landmark transaction that is a true win-win-win for our portfolio companies, SoftBank and Deutsche Telekom,” said Marcelo Claure, COO of SoftBank Group Corp, CEO of SoftBank Group International and ex- CEO of Sprint. “The long-term strategic partnership will create incredible opportunities for our portfolio companies to turbocharge their growth with access to approximately 300 million customers across Japan, Europe and the United States in total."

Under the agreement, Claure was elected to the Supervisory Board of DT.

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In a Tuesday note to investors, Jeffries analysts said that the move today is in line with executive comments at DT’s capital markets day “if unexpected in the method of execution” in terms of only 1.6% acquired using cash and the remainder through issuing DT shares to Softbank.

In June 2020, Softbank and DT reached a transaction agreement involving call options to up its stake in T-Mobile US that expire in 2024. It included options DT to purchase a total of about 101 million T-Mobile US shares from SoftBank, which would increase the operator’s stake to 51.8% giving it control of T-Mobile.

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“We had previously assumed that DT would exercise the options for cash and that these be exercised in 2024, at a cost of €13.4bn,” wrote New Street’s Ratzer on Tuesday.  

The firm views the new announcements as solid but also somewhat expected moves by DT. New Street anticipates the operator to use its remaining options with Softbank to ensure a majority stake of T-Mobile US in due time.

SoftBank is getting 225 million newly issued DT shares in the swap, in addition to cash funded by the T-Mobile Netherlands sale. The price per share for DT is at around a 12% premium to DT’s current stock price, a valuation both New Street and Jeffries analysts called out as an advantage.

Softbank then becomes a 4.5% stakeholder in DT, which is locked in until 2024, and the second largest private shareholder in the mobile operator.

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Together the cash and share swap equal around $7.7 billion.

New Street Research continues to be bullish on investments in DT. In a Tuesday note to investors writing, “not only as a way to get exposure to the story at TMUS, but also as a very attractive way to play the story in Germany, and we believe today’s move by Softbank would also be supportive of that view.”

Overall, the firm categorized the move today as “more favorable to DT than the initial agreement” but also a positive for Softbank with its direct equity stake in the European mobile operator.

“Softbank is now able to raise asset backed financing against the DT stake and the residual options, which might be appealing for them as they invest in their second Vision fund. We also believe Softbank might be interested in diversifying their holdings and see more value in DT as we believe the rump business does continue to look attractive,” wrote Ratzer.