D.Telekom pressed to do M&A, looks at Sprint: sources

By Nicola Leske and Nikola Rotscheroth

LUXEMBOURG/DUESSELDORF (Reuters) - Deutsche Telekom AG's major shareholder, the German state, is pressing it to make large acquisitions in the hope of raising its sagging share price, a source familiar with the government's thinking said.

"Berlin is very clearly on an expansion course and is putting pressure on Deutsche Telekom," the source told Reuters on Monday, as speculation swirled the German company could bid for U.S. wireless phone company Sprint Nextel <S.N>.

A source close to the company said Deutsche Telekom <DTEGn.DE> had been looking at Sprint Nextel since the U.S. company announced a huge goodwill writeoff in February. The person said no decision had been taken on whether to bid.

The Berlin government still owns around a third of the former state-owned company, has a representative on its supervisory board and has a major say in company decisions.

Asked about Telekom being interested in Sprint Nextel, German Finance Minister Peer Steinbrueck told reporters in Berlin he considered it to be "a rumor, like so much else."

Deutsche Telekom's chief executive, Rene Obermann, has said he wants to grow the group's mobile phone business through acquisitions to compensate for a dwindling fixed-line business and has linked his performance to boosting the share price.

Telekom shares lost 1.5 percent to close at 11.61 euros, the second-biggest decliner among German blue-chips <.GDAXI>. Sprint shares were up 4.3 percent at $8.23 by 1751 GMT.

Such a deal would vault Deutsche Telekom's T-Mobile USA unit past AT&T <T.N> and Verizon Wireless <VZ.N> <VOD.L> to the number one spot among U.S. mobile phone service providers, but industry experts were skeptical Telekom would pull it off.

"I cannot imagine that Telekom would decide to make this step at this stage," said Heinrich Ey, a fund manager at Allianz Global Investors.

MARKET POWER

Sanford C. Bernstein & Co analyst Craig Moffett estimated that Sprint commands 19 percent of the U.S. wireless market by subscribers, while T-Mobile holds 12 percent. Combined, they would exceed AT&T's 27 percent share, he said.

"Such market power concentration would likely draw very significant U.S. antitrust scrutiny," he said.

Ey said Sprint Nextel's low share price may make a takeover seem attractive, but the deal would require massive investment to integrate different network technologies.

Sprint, which has been struggling with network and customer service problems, has been running two networks that are different from T-Mobile's GSM infrastructure. Its new third-generation UMTS systems are expected to launch by mid-year.

Buying Sprint would also tie up management at a time when Deutsche Telekom is close to acquiring the Greek government's stake in OTE <OTEr.AT>, Ey added.

"Telekom wants to become less dependent on the Germany business. OTE is a correct step in this regard, but Telekom would be doing itself no favors with Sprint," he said.

Deutsche Telekom declined to comment on any potential interest in Sprint Nextel. Sprint also declined to comment.

In March, a research report by Merrill Lynch fuelled speculation Deutsche Telekom might consider a takeover of the third-biggest U.S. wireless carrier. Deutsche Telekom's T-Mobile USA is the fourth-biggest U.S. operator.

Merrill said Sprint's operational problems would cause it to cut prices in an effort to keep and attract customers, potentially starting a price war among U.S. operators, but an acquisition would avert such a development.

Whether the German government would ultimately agree to Deutsche Telekom essentially becoming a U.S. company is an open question, analysts have said.

Deutsche Telekom in September acquired SunCom Wireless for $1.6 billion in cash and bought U.S. wireless company VoiceStream in 2000 for $35 billion.

(Additional reporting by Tiffany Wu and Ritsuko Ando in New York, Dave Graham in Berlin; Editing by David Holmes and Greg Mahlich)