MetoPCS in Search of Potential Suitors

Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

MetroPCS Communications (NYSE: TMUS), the sixth largest US wireless operator has lately been in the news as it looks to be bought out by a larger company.  Quite often the company’s name has come up as an attractive acquisition target by interested suitors. And at this point of time, where the big two, Verizon and AT&T are threatening to become super powers in the wireless space, chances of consolidation between smaller players are strong. The regional carrier has long been eyed as an attractive target by fellow players. The company has a healthy balance sheet, a brilliant 4G LTE network spread in a number of cities and a subscriber base close to 10 million which would give considerable synergies from a combination to the buyer. So which companies could have an interest in buying this regional carrier? Sprint (NYSE: S), T-Mobile and Dish Network (NASDAQ: DISH) are definitely on the list. However, none of them commented on the report and preferred to remain silent.

Recently at the Goldman Sachs conference held at New York, Roger Lindquist, Chief Executive of MetroPCS shared his view on wireless industry consolidation which clearly showed that the carrier is keen on merging with a bigger entity. Let’s delve a little deep to see which suitor would make a good fit.

Which suitor suits the best?

Earlier this year Sprint was close to acquiring PCS, but its board withdrew the decision of buying the regional carrier as they felt that the carrier was highly priced at $8 billion. This was 30 percent higher than the share price at which PCS was trading then. Hesse refused to agree on the amount particularly as the company is already tied to huge capital expenditures regarding the iPhone deal with Apple. But Sprint's interest in PCS seems to have revived.

However, the reason is quite understandable. MetroPCS is building a strong 4G LTE network which would benefit Sprint greatly as the carrier is presently focused on its Network Vision. Also, the deal between the two makes more sense as compatibility issues would be minimal since both of them support CDMA networks. Technical complications would be less compared to MetroPCS-T-Mobile merger as T-Mobile’s network runs on GSM with HSPA+ technology while PCS is a CDMA carrier. In addition, PCS’s subscriber base would widen Sprint customers as well.

It was just the previous year when we saw AT&T targeting T-Mobile in the $39 billion deal. However that got scrapped by the FCC. Now T-Mobile’s role has reversed from being a target to a suitor. Both T-Mobile and Sprint have a debt heavy balance sheets with similar cash positions. So acquiring PCS would mean adding to the burden. Also, targeting PCS wouldn’t be a wise decision as their networks are incompatible and would involve technical complications. T-Mobile has already got delayed in rolling out the 4G LTE and so expecting that it would benefit from PCS’s LTE network would be a fallacy. The carrier should understand that merging with an entity having an incompatible network is not prudent or advisable. Of all the three consolidation options, T-Mobile would make least sense.

Dish Network:
MetroPCS’s merger with Dish would be an interesting one. Dish network, a satellite TV carrier, has an interest to enter the mobile world. Presently Dish possesses 40 MHz of S-band spectrum and plans to launch its LTE network by 2016. PCS would give it a strong base to start its own network helping it to directly compete with AT&T and Verizon.

My takeaway
MetroPCS is a stable carrier to merge with. If they get the right carrier and the right price, there is no reason why they would back out of a deal. While it’s a complete no for T-Mobile, Sprint and Dish would make good suitors. Sprint might be a little concerned given its debt position, but the network position of PCS would be great for the carrier which is rigorously building the LTE to achieve its Network Vision. While for Dish, PCS would give it a good start into the mobile space. It would be interesting to see how MetroPCS stands to gain from all this in case a deal takes place and how the merged entity prepares itself to take on the wireless biggies.

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