Skip to main content

The Globe and Mail

T-Mobile USA’s strategy surprises to the upside

Lex is a premium daily commentary service from the Financial Times. It helps readers make better investment decisions by highlighting key emerging risks and opportunities.

"Greedy hedge funds" as T-Mobile USA boss John Legere gratuitously labelled them this year. Deutsche Telekom had an agreement to merge its laggard U.S. unit with MetroPCS. But that group of dissident MetroPCS shareholders wrangled DT into lifting its offer in exchange for their approval. And after announcing a surprisingly strong quarter from the combined T-Mobile/MetroPCS on Thursday, where the company added about 700,000 subscribers, it looks like paying that ransom to clinch the deal was wise.

The merger finally allowed DT to list its T-Mobile unit, creating a path to an ostensible exit (remember the failed sale to AT&T?). But the merger also coincided with a radical change in strategy: T-Mobile, unlike the standard AT&T/Verizon model, would offer cheaper and more flexible monthly plans but would not discount phone prices. And it would also offer iPhones for the first time.

Story continues below advertisement

Put all that together and T-Mobile is the only U.S. mobile carrier showing growth in share among new subscribers, according to Moffett Research. The downside, however, of adding all those customers was diminished profitability. Operating cash flow margin fell to 24 per cent from 29 per cent the previous quarter but that is the tolerable consequence of adding subscribers.

DT owns three-quarters of T-Mobile so they are undoubtedly pleased that the shares of its U.S. subsidiary have climbed more than 50 per cent since the merger closed on April 30. DT also announced its own results on Thursday and with group revenue greater than expected thanks to the U.S. business whose results it consolidates on to its own books. DT's shares jumped 8 per cent. DT also lowered its free cash flow forecast for the year by €500-million ($685.6-million), to €4.5-billion as it plans to invest more heavily in the U.S. . If DT is bullish and committed to T-Mobile expect other investors to be as well.

Report an error
Comments

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

We’ve made some technical updates to our commenting software. If you are experiencing any issues posting comments, simply log out and log back in.

Discussion loading… ✨