T-Mobile and MetroPCS in a Win/Win Merger
Gargi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Two is always better than one, and such is the case for the two mobile giants T-Mobile USA and MetroPCS Communications (NYSE: TMUS). The reported merger of these two companies could not only boost their individual share price but also make the consolidated enterprise a force to be reckoned with in the wireless industry.
MetroPCS shares jumped 18% to $13.57 yesterday, soon after talks of the merger were announced. Deutsche Telekom AG, the parent company of T-mobile, also saw its shares climb 1.4% to 9.88 Euros in German trading.
The official confirmation of the merger means a deal worth $1.5 billion. Deutsche Telekom agreed to combine the two businesses in a stock and debt restructuring that would pay MetroPCS shareholders about $4 per share. 74% of the merged company will be held by Deutsche Telekom, but since the T-Mobile stock will be public a possible sell off in the near future cannot be discounted.
Change in Market Position
Both these companies have been struggling in the cutthroat competition prevalent in the U.S cellphone market. Even though the deal would bring more customers, airwaves, and geographic reach, T-mobile will still remain only the fourth largest US service provider, trailing rivals Verizon (NYSE: VZ), AT&T (NYSE: T) and Sprint (NYSE: S). In fact, at the end of the second quarter Sprint had 56 million subscribers, Verizon had 94 million, and AT&T had 105 million. Therefore, this merger may not immediately change T-mobile’s current position in the market, but it will surely give it an edge in days to come.
The merger and related announcement saw Sprint (cited as a potential acquirer of MetroPCS) fall 5.4% to $4.90 last week. AT&T failed to take over T-Mobile last year for $39 billion due to opposition by regulators, a fear that was shrouding this merger decision as well.
A minor hiccup in the merger could be the fact that each of these companies uses different cellular technologies, and it would require some sort of workaround before they can work on common operating standards.
MetroPCS uses CDMA (like Verizon), while T-Mobile uses GSM and HSPA+ (like AT&T). MetroPCS has already begun upgrading to 4G LTE, whereas T-Mobile has been lagging to upgrade to high-speed wireless 4G. Not to mention the fact that T-Mobile has been unable to cut a deal with Apple to sell its widely popular iPhone, which is already available at its three biggest rivals in the market.
Analysts predict that the integration can increase short term costs and hit margins, just like what happened to Sprint saw when it struggled to integrate Nextel. However, T-Mobile is confident of minimal customer losses during the network combination with MetroPCS, which is slated to be completed by the end of 2015.
The merger could help T-mobile widen its customer base and expand its geographic horizon. It would also result in variety of affordable products and services aimed at deeper and better network coverage.
The deal will surely enhance the overall financial position of the companies in the market by combining customers and technologies used in both companies in the most efficient manner. With things looking up for both the companies post- merger, only time will tell whether this coalition will strengthen or eat away into their assets.
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