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Merger with Orange could mean T-Mobile is worth nothing, is it?

According to an article on WSJ, a by-product of the merger between T-Mobile UK and Orange UK could well mean that the intrinsic value placed on the T-Mobile business is worth nothing.

In May Deutsche Telekon placed a value on T-Mobile UK business at £3.3 billion and Deutsche Telekom and France Telecom say the current net value of merging both companies will be £3.5 billion.

T-Mobile was struggling with a margin of 13.5 percent on earnings before interest tax, amortization and depreciation in Q1 along with declining revenues, and given capital expenditure would require a minimum of 8 to 10 percent of sales which doesn’t leave a great deal for working capital and other requirement. Thus free cash flow would not cover the cost of equity, so it can be seen why T-Mobile’s intrinsic value would be nil.