Blocked Merger: Another Opportunity for Sprint and Dish?

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

As some stakeholders continue to show their dissatisfaction with the T-Mobile and MetroPCS (NYSE: TMUS) merger, the latter pushed forward the date for the shareholders' vote. The date for the special meeting has been rescheduled from March 28 to April 12, where shareholders would discuss matter concerned to the proposed merger.

The largest investor of MetroPCS, Paulson & Co, publicly expressed its agitation regarding the deal and said that it would vote against the transaction, unless T-Mobile sweetens its offer. In addition, P. Schoenfeld Asset Management LP, which owns 2.3% of MetroPCS, has asked the two parties to update the merger documents with the latest regulatory filings of both the carriers before the vote.

Facing the pressure, the Richardson-based telecom provider moved the meeting date forward, hoping that it would give some more time to investors to evaluate and consider the benefits that the merger would bring to the combined entity.

The smallest of the national carriers, T-Mobile, is witnessing difficulties in fighting the stronger established players Verizon and AT&T. The combination with MetroPCS would give it the required strength to improve its struggling competitive position. The FCC also doesn’t seem to have any issue with the proposed merger, as it is rather encouraging telecom operators to grow stronger to combat the virtual duopoly of Verizon and AT&T.

But MetroPCS shareholders aren’t confident about the pending combination.

The issues raised

John Paulson, Hedge Fund manager of Paulson & Co., which has 9.9% stake in the company, is worried about the huge debt that would burden the company and lower its competitive position in the wireless market. T-Mobile’s total debt amounts to $15 billion, and this would lead to an aggregate debt of $23.2 billion for the combined company, which is enormous.

Paulson says that the consideration that the Richardson-based carrier is receiving to assume the $15 billion debt is insufficient. Further, considering the higher interest rates on the debt, and the impact of the added debt on MetroPCS’s share price, T-Mobile’s offer is lowering the value and not rightly compensating the carrier.

The debt to earnings ratio of the entity post merger would be as high as 3.6 compared to Sprint’s 1.5 post Softbank merger, Verizon’s 1.6, and AT&T’s 1.4. The new debt taken by Deutsche Telekom carries an exorbitant interest rate of 7%, while fellow rivals bear lower interest expense. Verizon's cost of finance is 2.7%, AT&T’s interest rate is 2.1%, while Sprint’s is 4.2%.

Paulson says that he would back the merger only if the debt load is reduced by $6.6 billion, and the cost of finance of the fresh debt is lowered to 4.2%. The next option for T-Mobile is to raise the deal price for MetroPCS and win Paulson’s favor. P. Schoenfeld Asset Management has also shown similar concerns with respect to the deal.

In case the deal falls through, what would happen to MetroPCS?

Other suitors

There are high chances that both Dish Network (NASDAQ: DISH) and Sprint (NYSE: S) would grab the opportunity to bid for MetroPCS. Both Sprint and Dish are vying for Clearwire (NASDAQ: CLWR). However, similar to MetroPCS investors, even Clearwire investors are extremely disappointed with Sprint’s $2.97 a share offer, which undervalues the company’s most prized possession.

Both Crest Financial and Mount Kellett Capital Management have opposed Sprint’s offer in favor of Dish's $3.30 a share proposal. As per the recent filings that Crest made with the FCC, Sprint has valued Clearwire’s spectrum at $0.21 per MHz-POP. But as per Information Age Economics’ (IAE) estimation, the spectrum should range between $0.40 and $0.70 per MHz-POP.

Both Sprint and Dish have been fiercely contending to get Clearwire. In case the T-Mobile merger is blocked, both Sprint and Dish would do their best to scoop up the regional player. Sprint recently made it public that Clearwire wouldn’t be its final spectrum hunt; it would continue making more spectrum deals.

On the other hand, Dish has been trying to find a wireless partner so that it can construct its wireless infrastructure to offer mobile wireless services. If the T-Mobile-MetroPCS deal gets blocked due to opposition, the regional carrier would have no difficulty in finding interested suitors.

The bottom line

The wireless industry is taking quite an interesting turn. The combination proposals made by both Sprint and T-Mobile are facing hurdles. MetroPCS’s board has recommended its investors to vote for the deal, as it would prove beneficial for the joint entity. However only time can tell whether the T-Mobile deal will receive a go-ahead signal, or MetroPCS will find other suitors.

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