Deutsche Telekom’s $50-billion question

Some industry analysts argue the German firm got a great buy because of strong expected growth in the wireless market. “It’s ridiculous to think the valuation for VoiceStream is overvalued,” asserted Thomas Lee, managing director of Chase H&Q.

“Historically whatever we thought was too much to pay for wireless assets later turned out to be a bargain because wireless growth has exceeded expectations.” Some 35 per cent of the U.S. population uses mobile phones, compared with 45 per cent in Europe – a discrepancy that points to the potential for wireless growth in the United States. Some analysts expect companies to make money from next-generation technology that brings the Internet to wireless phones.

It’s unclear which firms will get the licenses to expand their wireless services – a wild card that makes it hard to value any acquisition in the wireless sector. Under normal circumstances, analysts would look at earnings before depreciation, taxes and amortization, or EBITDA – a cash-flow measure that offers insight on a firm’s financial health.

Since VoiceStream is growing so quickly, EBITDA numbers aren’t much help. The price Deutsche Telekom paid reflects its hopes for future cash flow, something impossible to measure with any certainty. What’s more, earnings in the wireless telephony market are hard to predict: Customers show no brand loyalty, competition is evolving and technology is changing. Some analysts look at price-per-customer to value companies, but the number of subscribers is always changing. VoiceStream has 2.3 million subscribers, for which Deutsche Telekom is paying $22,000 each. The wireless firm expects to have four million customers by the end of the year, dropping the cost of each to $12,700.

“By the time the deal closes, the multiple may look a lot better,” said Marco Fasoli, a London-based managing director of Broadview Associates, a mergers-and-acquisitions advisory firm focused on tech companies. “Price-per-subscriber will go down if VoiceStream delivers the number of subscribers it’s promised.”

Deutsche Telekom has resorted to calculations based on the 100 million people in the area covered by VoiceStream’s network, or the 220 million in areas where the company is licensed to build a network. Such liberal estimates have other analysts fuming. “An American company could not get away with what Deutsche Telekom is doing,” said one analyst who declined to be named. “Their shareholders would not let them. They would be killed.”