This Wireless Deal Is Bothering Shareholders
Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A lot is happening in the US wireless space with carriers working hard to upgrade their networks to 4G LTE. The dominance of the two wireless carriers, Verizon (NYSE: VZ) and AT&T (NYSE: T), is being viewed as a big threat to competition. In the meanwhile, events in the past two weeks show how the next two national carriers, Sprint (NYSE: S) and T-Mobile, are desperate to improve their positions and compete with the dominant firms.
While T-Mobile and MetroPCS (NYSE: TMUS) are preparing to join forces, Sprint, with partner Clearwire, is said to be in talks with Japan’s Softbank. Sprint is holding talks with Softbank in an attempt to reposition itself to become a more competitive challenger to the feared duopoly. On the other hand, the fourth and fifth largest wireless service providers, T-Mobile and MetroPCS, are proceeding with the merger deal that is expected to clear the regulatory screening.
The deal is essential for T-Mobile, as it would give it access to additional spectrum and a brilliant PCS network, to better challenge Verizon and AT&T. Concerns about the duopoly increased after Verizon received access to additional AWS spectrum from a group of cable companies with its deal with SpectrumCo. Now, AT&T is planning to increase it spectrum holding through small deals. Individually these deals might not offer significant airwaves, but the total would increase AT&T’s spectrum position considerably.
However, the T-Mobile-MetroPCS deal has failed to please PCS investors, who sued MetroPCS and its board, claiming that the company’s proposed consolidation with T-Mobile is falling short to fairly compensate the shareholders. Let’s check out the details of the deal to see what is bothering these investors.
Not properly compensated
Shareholders have complained that the combination is “drastically undervalued.” The telecom operators had announced the merger on Oct. 3 stating the consolidation is aimed to increase customer satisfaction and improve customer experience on their network by offering wider range of affordable products and services.
MetroPCS would conduct a 1-for-2 reverse stock split and provide 26 percent of the combined entity along with $1.5 billion cash to its shareholders. It would then issue the remaining 74 percent of common stock to the German giant. As per market estimates, the merged company is calculated to have a pro forma revenue of around $24.8 billion. It would also enjoy cost synergies to the extent of $6-7 billion and lead to an attractive growth in its financials.
Given the benefit the combined company is expected to enjoy, PCS shareholders are not being adequately compensated. Investors are extremely dissatisfied with the way the company’s management is working out the deal. Plaintiffs have complained that management is not acting in the best interest of shareholders. Instead, they seem to have more of a personal interest from the merger, as management is said to receive millions of dollars that will not only compensate them for the change-of-control, but fatten their pockets as well.
Shareholders believe that management purposely designed the deal in such a manner so that one cannot back out. The no-solicitation clause of the deal would prevent PCS from leaking confidential information to other prospective buyers. Not only this, but in case PCS backs out or terminates its agreement with T-Mobile for a better offer, it would have to pay $150 million in termination fees to T-Mobile.
The board also agreed to another clause that gives a matching rights provision to T-Mobile so that it can offer a higher price in response to a counter-bid by a prospective suitor. This is because PCS felt Sprint could propose a buyout, so they kept provisions for T-Mobile to make changes and bid a higher price. However, Sprint is silent on a MetroPCS bid at the moment as it is advancing talks with the Japanese telecom service provider.
MetroPCS’s share, which is currently trading at $11.88, is valued in this deal at $12.48. The 52 week high is $14.51 and it traded for $18.69/share in May 2011. Aside from this, analysts estimate that the company could be valued as high as $18.00/share. So a valuation of $12.48 isn’t justified at all. Even the market’s reaction to the deal wasn’t pleasant, and it was reflected in its price, which fell from $13.57 to $12.24 the day the details of the proposed transaction was disclosed.
My takeaway
The wireless industry is in the consolidation stage where both big and small players are making an effort to merge with one another to fight Verizon and AT&T. While national carriers T-Mobile and Sprint wish to become stronger and stand as better competitors to the big two, smaller carriers are willing to combine to form part of a bigger entity to become self-sufficient. While the T-Mobile-PCS combination is going to benefit the merged entity to sustain and grow, the entire idea of maximizing shareholders value will be defeated if investors are unhappy.
It will be extremely interesting to see how the telecom industry looks like one year in the future. Will Verizon and AT&T continue to be on top while other carriers linger way behind them? Or will the effort of T-Mobile and Sprint gradually pay off?
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