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Deutsche Telekom faces tough call on U.S. mobile exit

* Japan's Softbank seen exploring a bid for T-Mobile US

* D Telekom keen to exit US; wary of deal getting blocked

* US regulators concerned about Sprint-T-Mobile tie-up

* US exit would help D Telekom fund European investment

FRANKFURT/PARIS, Feb 11 (Reuters) - Deutsche Telekom's new boss may soon face a tough decision on whether to try selling the company's U.S. mobile business to Japan's Softbank, and risk the cost and disruption of being thwarted by U.S. regulators keen to protect competition.

The German group ultimately would like to sell T-Mobile US because it sees its fourth position behind Verizon , AT&T, and Softbank's Sprint as limiting long-term profitability, said people familiar with its thinking.

A U.S. exit would also give Deutsche Telekom more firepower to upgrade its networks in Germany, where it faces stiff competition from cable operators, and expand in Eastern Europe, as it did with a deal announced on Monday to take full control of its Czech subsidiary for $1 billion.

But new chief executive Tim Hoettges, who took the helm at the start of this year, remains wary of repeating the 2011 fiasco of U.S. regulators blocking the $39 billion sale of T-Mobile US to AT&T, said people close to the company.

He played a leading role in negotiating the blocked AT&T tie-up, so knows better than anyone the risks and costs involved of failure - which included an exodus of T-Mobile US customers as management focused on trying to get the deal done.

Even a large break-up fee from Sprint and estimated synergies of up to $20 billion might not be enough to tempt him.

"They have already failed once, they don't want to fail again," said a banker familiar with the group's thinking.

Any approach by Softbank for T-Mobile US, which has been the subject of media reports since December, would be the latest in a series of mooted deals in a telecoms industry looking to fend off competition from cable firms and take advantage of low borrowing costs. Verizon is in the midst of buying out its U.S. mobile partner Vodafone, while Mexican telecoms tycoon Carlos Slim has made multi-billion dollar investments in Europe.

However, the recent commercial success of T-Mobile - which added 1.65 million customers in the last quarter helped by CEO John Legere's sales tactics targeting rivals' customers - means that Deutsche Telekom is not in a rush to sell.

"They could wait a couple of years now that the company is performing well," said the banker.

WARNING

Softbank's ambitious founder Masayoshi Son is eager to marry third-place Sprint with T-Mobile to better take on AT&T and Verizon in a U.S. market with 325 million total connections.

The tie-up would create a firm with $62 billion in sales, 52 million contract customers, and 23 percent market share.

But U.S. officials, including antitrust chief William Baer and Federal Communications Commission chairman Tom Wheeler, have signalled concerns about cutting the main competition in the U.S. market to three mobile players and the impact that could have on consumers and prices.

Sprint publishes full-year results on Tuesday, and will likely face questions from analysts about the potential deal.

Bloomberg reported on Thursday that Softbank and Sprint would decide in the next few weeks on whether to go ahead with a bid, while the Wall Street Journal reported on Monday that the companies were "regrouping" and had not decided whether to bid.

Deutsche Telekom's concerns about regulatory opposition mean it would want a significant break-up fee to fall back on in case the deal was blocked, said two people close to the situation.

"Sprint, however, does not want to bear the antitrust risk alone so is pushing for lower break-up fees," said one of the people, adding such fees could be less than $3 billion.

Deutsche Telekom is not opposed to keeping a minority stake in the combined company, said the people, so if a deal was attempted, it could be done in cash and shares.

REJUVENATED

Despite T-Mobile's recent turnaround, Deutsche Telekom's foray into the United States, which began with the acquisition of VoiceStream for $50.7 billion in 2000, has not been smooth.

Deutsche Telekom has written down the value of T-Mobile US by almost two-thirds in the past decade, and for years sent billions to prop it up and pay for costly network upgrades.

The unit's struggles explain why Deutsche Telekom was eager to sell to AT&T in 2011 when Hoettges was group finance chief. When the deal failed, Hoettges began negotiating the purchase of smaller player MetroPCS to help T-Mobile bulk up. That deal - along with a $6 billion break-up fee from AT&T including cash and mobile spectrum - put T-Mobile back on the growth track.

The MetroPCS deal also turned T-Mobile US into a listed firm in the United States, allowing T-Mobile to borrow more to finance its development and making it more self sustaining.

Deutsche Telekom now owns a 67 percent stake in T-Mobile US.

In the first nine months of 2013, T-Mobile US accounted for one-third of Deutsche Telekom's revenue of 44.5 billion euros ($60.7 billion) and one-fifth of its earnings before interest, taxes, depreciation and amortisation (EBITDA) of 13.4 billion euros, excluding special items.

The business contributed 334 million euros in free cash flow to Deutsche Telekom, down 72.5 percent from a year earlier because of increased marketing spending by T-Mobile.

A U.S. exit would bring in much-needed cash that Deutsche Telekom could deploy to upgrade broadband networks in Germany to faster fibre. In December 2012, it announced a three-year, 18 billion euro network investment plan for Germany, and its other businesses in Britain and Eastern European also need resources.

"It makes a lot of sense for Deutsche Telekom to exit the U.S. at a good multiple and redirect capex to Germany where competition is increasing," a telecoms banker said.

"The U.S. is not a logical place to be for them and they will need more capex to be relevant there."

But if the deal fails to materialise, Deutsche Telekom will not be entirely sorry to keep T-Mobile US since it has better growth prospects than its European business, according to Malte Raether, an analyst at Warburg Research. And AT&T could make a bid for Vodafone in the second half of the year, which would give Deutsche Telekom a new "serious competitor" in Europe.

"It might come in handy for Deutsche Telekom to have the option to compete against AT&T in its home market," he said.

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