T-Mobile and MetroPCS to Join Hands

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

The buyout rumors about MetroPCS (NYSE: TMUS) is out again and T-Mobile appears to be the most interested suitor. The two companies are said to be in talks regarding a possible merger. The US wireless industry is dominated by Verizon (NYSE: VZ) and AT&T (NYSE: T) followed by the other two national carriers Sprint (NYSE: S) and T-Mobile. However the two biggies are vastly bigger than their followers. In case the T-Mobile- MetroPCS deal materializes, it would make the former stronger to compete in the wireless space. The company would still be way behind the top two, but definitely better positioned to compete.

T-Mobile’s deal with the regional carrier is not expected to invite much speculation from the FCC, however it raises a doubt about Sprint’s future prospects of consolidating. The third largest US carrier has been trying hard lately to catch up with its bigger rivals: Verizon and AT&T. Not only is it focused on achieving its Network Vision plan, but it also desires to take active part in consolidation programs. However, Sprint would have to remove the two suitable candidates from its target list as they desire to merge with each other. Not only would Sprint lose out on appropriate targets and be unable to get closer to Verizon and AT&T, but it would also have to endure stronger rivalry from the merged entity of T-Mobile and PCS.


Get stronger to take on Sprint
T-Mobile’s primary objective to merge with PCS is to become a stronger competitor to Sprint, especially in the low cost cellphone service arena. Sprint approximately has 56.4 million subscribers, while T-Mobile’s customer base of 33.2 million added with PCS’s customer base would result in a total of 42.5 million subscribers. The acquisition of MetroPCS would significantly boost T-Mobile and help in minimizing its gap with Sprint.

Early this year Sprint had attempted to acquire PCS, but the deal fell through as the company’s board disapproved the transaction. Management is working hard to bring the company back on track. It's evident from its efforts adding the iPhone to its lineup, working on upgrading its network, and playing an active role in mergers. But the company seems to be too late while T-Mobile is in action.


The deal
MetroPCS would perform a 1-for-2 reverse stock split and give $1.5 billion to its shareholders. This implies that the number of outstanding shares would be halved while the price would be doubled. After this, it will issue common stock valuing 74 percent of its stock to T-Mobile’s parent, Deutsche Telekom. This would give the German giant control of the combined entity. However, for the time being customers would have to deal with the two merged entities separately as they have different network technologies. The problem would disappear eventually as the combined entity plans to deploy 4G LTE that would be compatible both with MetroPCS phones as well as T-Mobile phones.

Both companies’ boards have passed a green signal to the deal and desire to close it in the early half of 2013. Let’s check out how T-Mobile expects to benefit from the consolidation.


What are the synergies?
T-Mobile would be better equipped to deploy the LTE technology post combination. Both companies have been working on low cost LTE with strong presence in major cities. Also, combining resources would be easier as both companies have 1700Mhz and 1900Mhz spectrum. However, the network incompatibility issue raises concern as it makes the combination process complex. We know that T-Mobile is a GSM carrier while MetroPCS runs on CDMA. But this should not be treated as a barrier to the proposed combination. The reason being, MetroPCS plans to shed its CDMA network and dedicate itself solely to LTE. In addition, the regional operator is also said to be working on developing a technique to roam on the LTE portion of the networks.

The merged entity would also benefit from cost synergies in marketing and network maintenance. Other than this, T-Mobile would also get access to the much needed airwaves and LTE network that MetroPCS possesses.


My takeaway
A deal with MetroPCS would help the fourth largest US operator to take advantage from increased scale and a better network. However, it will still need to make a huge investment to install the LTE network across the country in order to compete with the bigger players. Verizon and AT&T would still hold dominant positions in the wireless market. However, the deal would strengthen T-Mobile’s competitive position particularly from what it was a year ago and this would also please the regulators who fear the wireless duopoly.

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