Shares of MetroPCS (PCS) ended a volatile week with gains of 8%. The wireless broadband mobile communication provider in a range of US metropolitan areas, is now openly "in play". In Tuesday the company reached an agreement with T-Mobile USA, but later in the week reports surfaced that competitor Sprint Nextel (NYSE:S) might make an offer for MetroPCS as well.
Shares of MetroPCS traded between $11-$14 per share during last week as a range of rumors hit the market about possible deals.
On Tuesday reports hit the market that Deutsche Telekom (OTCQX:DTEGY) was in talks with MetroPCS Communications. Speculation about a possible tie-up already hit the market after T-Mobile USA sold 7,200 towers to Crown Castle International for $2.4 billion last week. The deal with Crown Castle gave T-Mobile USA more financial resources to make a possible deal.
Under a proposed agreement, Deutsche Telekom's T-Mobile USA unit would merge with MetroPCS in a deal giving the Germans a 74% stake in the new company. MetroPCS's shareholders would receive the remainder 26% of the shares and $1.5 billion in cash.
Last year the $39 billion deal to sell T-Mobile USA to AT&T was dropped on anti-trust concerns. From that point in time, Deutsche Telekom has been anxiously exploring options for its troubled US unit.
A merger of T-Mobile USA and MetroPCS would still lag behind Verizon Wireless (VZ), AT&T (T) and Sprint Nextel (S). Combined, the combination would be the fourth largest US carrier with annual sales of $24.8 billion and 42.5 million subscribers.
No Transformational Deal - Industry Landscape will not change
A possible deal between the two companies would not be a transformational deal. T-Mobile's 33.2 million subscribers and the 9.3 million subscriber base from MetroPCS would result in a new carrier with 42.5 million subscribers. Despite the deal, the combination would still rank number four, behind Sprint Nextel which has 56 million subscribers. AT&T and Verizon Wireless are still leading the market, with subscriber bases around the 100 million mark.
While a deal would not change the competitive landscape, it would provide significant synergies. Deutsche Telekom estimates that annual costs synergies could range from $1.2-$1.5 billion. The carrier would get access to more popular handsets and have network costs benefits. T-Mobile is the only large US carrier still excluded from Apple's (AAPL) iPhone. The lack of iPhone offerings, has resulted in a roughly 10% decline in the customer base over the past two years. Contrary to common post-paid contracts, MetroPCS offers no-contract, pay-as-you-go phones.
The details of a possible deal indicate that T-Mobile USA is serious about a possible deal. The deal values T-Mobile USA at $26 billion according to some analysts, down a third from the deal value of $39 billion offered by AT&T. In recent quarters, the company has already taken billion dollar write-downs on its US assets.
The company's have agreed on break-up fees in their negotiations. If T-Mobile breaks up the talks it will pay $250 million to MetroPCS, while the latter will pay $150 million to T-Mobile in case it breaks up the talks. Deutsche Telekom already received a massive $3 billion break-up payment when the deal with AT&T collapsed.
Sprint As A Possible Third Party?
CEO Dan Hesse of Sprint, the third largest US carrier, said the board of Sprint is meeting for the second time this year to evaluate a possible acquisition of MetroPCS. A possible deal between T-Mobile and MetroPCS would threaten its position as the third largest carrier.
In February of this year, Sprint Nextel's board rejected a possible deal with MetroPCS as the deal was too costly. Sprint, which is saddled with a net debt position of roughly $15 billion, most likely had to use its own stock to make a deal with MetroPCS Communication. Back in February, shares of Sprint Nextel were valued at just $2.30 per share, or $7 billion.
Shares more than doubled from that point in time to $5.20 per share at the moment, valuing the equity at almost $16 billion. A possible deal with MetroPCS would be much less dilutive to Sprint Nextel shareholders at today's prices.
Despite a recovery in Sprint's share price, T-Mobile USA, backed by its parent company in Germany has superior financial ammunition.
MetroPCS is once again the target of consolidation activity in the US wireless mobile landscape. This time it is almost certain that some form of consolidation will take place, but the exact outcome is still unknown. The fact that T-Mobile USA remains committed to do a deal, has the most financial resources, and has initiated the consolidation talks, gives the company some key advantages over Sprint Nextel. If a deal between T-Mobile and MetroPCS will not take place, T-Mobile stands to receive a break-up fee for the second time.
While it is unclear which carrier get's away with MetroPCS's operations, it is clear that investors in MetroPCS are the clear winner. At a closing price of $12.65, shares are up 45% for the year. Shares more than doubled from their lows in June of this year. Long term investors probably disagree as shares are still trading 50% below levels in 2007. A substantial premium in a deal would ease some of the pain.