Deutsche Telekom 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 agreement, which creates a new U.S. industry leader with Deutsche Telekom as an 8 percent shareholder, is the biggest M&A deal worldwide so far this year and Germany's biggest for a decade. It is expected to close in the second half of 2012.

The deal 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 Europe. It is also likely to raise significant anti-trust concerns.

This gives us enormous scope for the future implementation of our strategy, Chief Financial Officer Tim Hoettges told journalists on a call, saying Deutsche Telekom would invest in new growth businesses like web services.

Shares in Deutsche Telekom initially leapt more than 16 percent on the news, as investors welcomed 5 billion euros ($7.1 billion) in planned share buybacks and praised the unexpectedly high price that 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 that the valuation was about 50 percent ahead of consensus standalone valuation.

By 0955 GMT, Deutsche Telekom shares were up 13.8 percent to 10.91 euros, lifting the European telecoms index 3.8 percent.

The credit market reacted sharply positively to the surprise sale 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.

GROWTH CONCERNS

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.

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

We are concentrating on the organic growth of our business, he said on the conference call.

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.

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.

The news also lifted other European telecoms stocks, particularly Vodafone, whose U.S. joint venture Verizon Wireless

is expected to 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 been trying to find a solution for its U.S. mobile business, which was for years a cash cow for the company but lacked the necessary scale to compete with giants AT&T and Verizon Wireless.

In the past weeks, speculation had been rife that T-Mobile USA would merge with Sprint Nextel.

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

Hoettges said on Monday that Deutsche Telekom had been in discussions about five different solutions with potential partners at the same time.

It was extremely complicated to keep all the balls in the air at the same time, he said.

(Additional reporting by Christoph Steitz and Hakan Ersen in Frankfurt and Alex Chambers in London)

(Editing by Sophie Walker)

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