Deutsche Telekom AG said it would focus on organic growth and return cash to shareholders after agreeing the sale of T-Mobile USA to AT&T for $39 billion, lifting its shares to a two-year high.

The deal, which creates a new U.S. industry leader with Deutsche Telekom as an 8 percent shareholder, is the world's biggest M&A deal this year and Germany's biggest in a decade. It gives AT&T access to T-Mobile's spectrum, crucial for expansion.

The agreement ends long-running uncertainty about Deutsche Telekom's sub-scale U.S. business, but raises questions about the company's growth strategy as it retrenches in its European heartlands. It will also raise anti-trust concerns.

Deutsche Telekom Chief Financial Officer Tim Hoettges said on Monday the company would focus on organic growth. But its strengthened balance sheet will give it an advantage in bidding for European assets, for example in Poland and Serbia.

This gives us enormous scope for the future implementation of our strategy, Hoettges told journalists on a call, saying Deutsche Telekom would continue to focus on growth areas such as commercial mobile Web services.

Deutsche Telekom Chief Executive Rene Obermann had failed to impress the market a year ago when he promised to transform the company's business model with a slew of new paid-for services using Internet technology.

Deutsche Telekom shares initially leapt more than 16 percent in reaction to the 5 billion euros ($7.1 billion) in planned share buybacks and the unexpectedly high price AT&T will pay.

Given the solid valuation and the fact that we thought T-Mobile USA would struggle to meet targets, selling is a good move, UBS analyst John Hodulik wrote, adding the valuation was about 50 percent above its consensus standalone valuation.

Deutsche Telekom shares closed up 11.3 percent at 10.67 euros after hitting a 26-month high of 11.15 euros. The credit market also reacted positively, with traders marking Deutsche Telekom bonds tighter.

T-Mobile will use the $25 billion cash proceeds of the deal to pay down debt, buy back shares and underpin its dividend payout strategy.

BETTER POSITIONED

Deutsche Telekom said it would have no extra cash from the deal for acquisitions but it could sell down part of its AT&T holding or use it as currency. It will also be better positioned to raise loans after making debt repayments.

I think they would be extremely careful about doing any new deals ... they come from a very strict financial discipline ... I don't expect them to go out on a binge, a Top 10 institutional shareholder in Deutsche Telekom said.

Hoettges said acquisitions were not Deutsche Telekom's priority and it had no plans to use the proceeds for expansion in fast-growing regions such as Africa or Asia.

Other European telecoms companies are also turning their attention inwards as deals in higher-growth markets become politically and financially more difficult, especially given the turmoil in North Africa and the Middle East.

Vodafone is exiting minority stakes abroad and sold its stake in China Mobile for $6.5 billion last year, while France Telecom is treading a cautious path with its African expansion ambitions.

Deutsche Telekom operates in about 50 countries, mostly in western and central Europe. Outside Europe and excluding T-Mobile USA, its only activities are in IT services through its T-Systems unit.

Stephan Thomas, who manages a fund holding 8.5 million Deutsche Telekom shares at Frankfurt Trust, said the news was a positive surprise but he was worried about future growth prospects as well as potential anti-trust issues.

It's neither in the BRIC countries nor in other strong growing markets. I see little room (for growth) in the future. I'm also not a fan of share buybacks. Due to the limited growth perspectives I remain underweight in the stock, he said.

The deal will give the new combined company about 40 percent of the U.S. mobile market, ahead of Verizon Wireless and number three Sprint Nextel.

We expect a challenging regulatory review, Citi analysts Michael Rollins and Simon Weeden wrote in a note. We would only place a maximum probability for approval of 50 percent ... at this early stage in the process.

Monday's news also lifted other European telecoms stocks, particularly Vodafone, whose U.S. joint venture Verizon Wireless could benefit from less competition and could snap up some assets that AT&T may have to sell.

Vodafone shares rose 4.2 percent and Greece's OTE, in which Deutsche Telecom owns 30 percent, rose 7.8 percent.

Deutsche Telekom had for some time been seeking a solution for its U.S. mobile business, which was for years a cash cow but lacked the scale to compete with AT&T and Verizon Wireless.

Morgan Stanley was lead adviser to Deutsche Telekom, along with Deutsche Bank and Credit Suisse. Greenhill & Co, JP Morgan and Evercore Partners advised AT&T.

(Additional reporting by Christoph Steitz and Hakan Ersen in Frankfurt with Alex Chambers and Sinead Cruise in London; Editing by Sophie Walker and David Holmes)

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