On May 9th, 2012, it was leaked that Deutsche Telekom (OTCQX:DTEGY) is in talks for merging MetroPCS (PCS) with T-Mobile, causing MetroPCS shares to spike over 14 percent in midday trading. The merge between the fourth largest U.S. wireless carrier and the seventh largest would still not surpass Sprint (NYSE:S) in terms of subscribers, but it would allow for T-Mobile to improve its footprint on the market. In this article, I analyze this potential merger and provide some insight about how to invest.
The big opportunity that I see with this merger is that MetroPCS has an LTE network and T-Mobile will not have an LTE network until 2013. Acquiring MetroPCS and closing the deal quickly could allow T-Mobile to potentially go live with their LTE technology early and it would strengthen MetroPCS's existing network, which has mediocre reviews.
The big risk that I see with T-Mobile and MetroPCS merging is that they use different technology. T-Mobile uses GSM technology, like AT&T Mobility (NYSE:T) while MetroPCS uses CDMA technology, like Verizon Wireless (NYSE:VZ) and Sprint. The changeover may turn away MetroPCS subscribers and the effects would be felt immediately as MetroPCS subscribers do not have contracts.
What these talks tell me is that Deutsche Telekom is looking for an acquisition to boost its T-Mobile USA pay-as-you-go business. Leap Wireless (LEAP) shares also took double digit gains after the news was reported as investors believe they will benefit from MetroPCS being bought or that LEAP is also a potential target. Leap Wireless, owner of the Cricket network, has similar wireless technology to Verizon, MetroPCS, and Sprint.
In the end, these talks are just a seemingly desperate attempt for T-Mobile USA to add more subscribers and utilize economies of scale. There are now 9 mobile networks in the United States with more than 5 million subscribers and number 10 has fewer than 1 million subscribers. Clearwire's majority ownership by Sprint takes them out of the pictures, so that just leaves TracFone, MetroPCS, Cricket, and U.S. Cellular for T-Mobile to potentially acquire. None of these potential acquisitions should spark anti-trust concerns.
I believe that MetroPCS and Leap Wireless each have about a 50 percent chance of being acquired or merging in the next 18 months. If they do get bought out, expect a nice premium and returns of over 30 percent for investors. I would suggest going long on both MetroPCS and Leap Wireless right now. As for T-Mobile, I believe they will continue to struggle and investors should stay away. Their owner, Deutsche Telekom, has other businesses affected by other market events, so I wouldn't recommend shorting the stock either. Mobile networks have huge fixed costs and adding subscribers has incredibly positive effects on these companies' earnings. Expect them to do everything they can legally do to team up.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.