Metropcs Investors Express Concerns For T-Mobile Deal

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The US wireless industry is witnessing several consolidation efforts, as carriers try to join forces and resources to compete more effectively. The two deals, Softbank – Sprint (NYSE: S) – Clearwire (NASDAQ: CLWR) and T-Mobile – MetroPCS (NYSE: TMUS), are the most talked-about agreements in the wireless space. Just as Sprint is facing opposition from Clearwire investors, who seem to be unhappy with the undervalued offer, T-Mobile is witnessing a similar issue with MetroPCS investors, who are dissatisfied with the terms.

In October, parent company Deutsche Telekom proposed to combine T-Mobile with MetroPCS. It would gain a 74% ownership stake in the regional carrier, giving T-Mobile the required strength to attack larger rivals Verizon (NYSE: VZ), AT&T (NYSE: T), and Sprint. As per the agreement, a reverse merger would take place, and MetroPCS would undergo a 1-for-2 reverse stock split and offer $1.5 billion to its shareholders. However, some shareholders are not in favor of the planned acquisition and wish to block the same. They believe that the prepaid wireless operator would be better off as an independent entity.

The troublemakers’ concerns "make a lot of sense"
P. Schoenfeld Asset Management
(PSAM) whose clients hold 8.3 million shares of MetroPCS, said that it filed proxy with the US Securities and Exchange Commission to seek votes from shareholders who oppose the proposed transaction. The owner of 2% of MetroPCS shares is encouraging investors to voice their opinion regarding the deal. PSAM soon found a friend in PCS’s biggest investor Paulson & Co, with 8.7% ownership, when the hedge fund expressed its concern regarding the prospects of the transaction.

The primary concern regards the total debt of the combined entity. Not only is the combined debt massive, but the interest rate is exorbitant, given the combined entity’s expected credit rating. This makes the combination a risky venture for PCS shareholders. The "exchange ratio" offered to the PCS shareholders is too low to compensate for the risk they would undertake post-combination.

PSAM considers the offer unfair, and believes that it would not do justice to the shareholders. The investor has therefore decided to vote against the proposal unless conditions are modified. On the other hand, Paulson would make a final voting decision once it gets the "final merger proxy," but it doesn’t find PSAM’s concern to be baseless; instead, it says PSAM's reservations "make a lot of sense."

Under the present circumstances, both PSAM and Paulson believe that staying as a standalone company and considering other attractive opportunities would be more rewarding for MetroPCS. Despite all this, Deutsche Telekom"remains committed" and is confident to close the deal by the middle of the year. The company says that the merger would prove fruitful for both T-Mobile and MetroPCS, as it would help them combine resources to make a stronger contender to battle larger players.

The supporter
Other than Deutsche Telekom, the National Association of Broadcasters (NAB) is also positive about the prospects of the deal. Competition is revving up in the wireless market, and with users' rising data demand, telecoms' spectrum assets are being viewed as the industry's most valuable weapon. T-Mobile admits that its PCS merger would significantly enhance its spectrum holdings -- a big help, especially as the carrier continues to upgrade its network.

NAB President Gordon Smith points out that T-Mobile is not the only carrier looking for spectrum acquisitions; lead carrier Verizon also purchased AWS spectrum last year in a $3.9 billion deal from a group of cable companies. Even the second-largest US carrier, AT&T, is hungry for spectrum, and is on an acquisition spree to add to its existing spectrum position. It acquired 2.3 GHz WCS spectrum to facilitate its 4G LTE deployment, and it isn’t satisfied yet.

The carrier plans to buy more airwaves from Verizon in the lower 700 MHz B band. Selling spectrum is part of Verizon’s promise to the regulators when it got its $3.9 billion SpectrumCo deal approved. Kansas-based Sprint, which has agreed to sell 70% stake to Japan-based Softbank, has its eyes on Clearwire. The company already owns more than half of the Bellevue-based carrier, and wishes to acquire the remainder so that it gets total control over its spectrum.

However, Clearwire investors aren’t happy with Sprint’s $2.97-a-share proposal particularly after Dish’s higher offer of $3.30 a share. They consider the deal a gross undervaluation of the company’s most prized asset.

The bottom line
While Clearwire shareholders are dissatisfied, PCS investors are worried about the impact of T-Mobile's huge debt burden on the joint company. The Richardson carrier had several suitors, including Sprint and Dish, but it spurned those proposals. Though the current bid is being criticized by PCS investors, finding a suitable suitor could be a difficult task for PCS after it dismissed earlier offers. However, Dish could make another attempt on PCS, as chances are high that it would lose Clearwire to Sprint. It would be interesting to see how things move about for both PCS and T-Mobile.

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