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Telekom dials Powertel
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August 28, 2000: 6:55 a.m. ET
Deutsche Telekom in $5.9B deal to complement VoiceStream mobile buyout
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NEW YORK (CNNfn) - Germany's Deutsche Telekom AG agreed late Sunday to purchase its second U.S. wireless carrier in a month, striking a $5.9 billion all-stock buyout of Powertel Inc., a fast-growing mobile operator based in the Southeast.
The agreement, which is contingent on Deutsche Telekom closing the $42.1-billion acquisition of VoiceStream Wireless Corp. announced last month, aims to fill a gap in the German company's growing U.S. arsenal, which will now include cellular coverage in 24 of the top 25 U.S. markets.
Deutsche Telekom's buyout binge has drawn the fire of U.S. politicians, who are wary of the large stake that the German government holds in the company, and the Powertel acquisition is likely to run into the same issue. VoiceStream itself agreed Sunday to take control of Powertel - but only if Deutsche Telekom's U.S. acquisition push falls through.
Like VoiceStream and T-Mobil, Telekom's domestic mobile phone unit, Powertel relies on the GSM standard, the most popular digital cellular standard in the world. The four-year old, West Point, Ga.-based company has roughly 727,000 customers in 12 southeastern states, stretching from Kentucky to Florida -- areas where VoiceStream currently offers no wireless service.
"Powertel is complementary to the VoiceStream footprint, and it looks as though (Deutsche Telekom) paid less for the Powertel subscribers than for VoiceStream subscribers," said Francois Travaille, telecom analyst at BNP Paribas in Paris, who has a "neutral" rating and a  35 per share price target on Deutsche Telekom. 
Combined, the three companies will boast roughly 20.5 million customers worldwide, including roughly 2.5 million in the United States. VoiceStream has the broadest reach of any GSM provider in the United States, reaching 2.3 million customers throughout the nation.
Based on the total value of the deal, the German telecommunications heavyweight is paying about $9,700 per Powertel customer, far less than the $17,500 per subscriber in the VoiceStream deal, according to Deutsche Telekom spokesman Hans Ehnert.
Terms of the agreement call for Deutsche Telekom to swap 2.6353 shares of its stock for each Powertel share. The company will also assume roughly $1.2 billion in Powertel debt.
Shares of Deutsche Telekom (FDTE) rose 0.6, or 1.3 percent, to 44.90 in Frankfurt trading Monday. Deutsche Telekom, which said in July its first-half profit would be down by about 26 percent from the previous year's level, is expected to give further details on its first-half earnings on Tuesday. The company cited competition and the cost of building out its networks for the lower earnings.
Based on Deutsche Telekom's closing price on the Frankfurt Stock Exchange Friday, the buyout values each Powertel (PTEL: Research, Estimates) share at $105.36 -- for a 22-percent premium from its closing price Friday at $86.62.
Same political issue as VoiceStream?
The Deutsche Telekom buyout of VoiceStream first valued the U.S. company at about $174 a share  , but based on current stock prices, the agreement values VoiceStream at $158.99 a piece.
Shareholders, fearing opposition by U.S. politicians and regulators, have kept the VoiceStream shares far below that level. VoiceStream shares closed at $118.19 Friday.
Sen. Ernest Hollings, D-S.C., has introduced legislation now pending in Congress that would prohibit the Federal Communications Commission from permitting the transfer of American wireless licenses to Deutsche Telekom or any other German firm for at least a year.
Hollings, the ranking Democrat on the Senate Commerce Committee, has cited national security concerns for his proposal, noting that Deutsche Telekom is 57 percent owned by the German government.
The legislation would require that Germany cut its holding to 25 percent before a deal could be approved. As it now stands, the government would own roughly 45 percent of the enlarged company once the deal is completed.
VoiceStream waiting in the wings
VoiceStream, the no. 8 U.S. mobile phone company, agreed to buy Powertel for about $4.7 billion - but the deal will only become effective should the Deutsche Telekom/VoiceStream deal fall apart.
That agreement calls for Powertel shareholders to receive VoiceStream common shares at a pre-determined conversion ratio. If VoiceStream's shares close at $130.77 or above during the 20-day period ending 5 trading days prior to the closing of the deal, Powertel shareholders will receive 0.65 Voicestream shares. But if the Bellevue, Wash.-based company's shares close at $113.33 or below, they will receive 0.75 shares.
Based on closing prices Friday, the VoiceStream deal values each Powertel share at $85, a slight discount to its closing price Friday. 
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