T-Mobile MetroPCS Deal: The Dawn is Yet to Break
Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
T-Mobile finally got a green signal for its proposed merger with MetroPCS (NYSE: TMUS) from the regulators. Despite agitation from PCS investors, FCC showered its blessings on T-Mobile by approving the deal. The U.S. Department of Justice is also satisfied with its assessment of the impending merger, and believes that the spectrum license transfer does not threaten public interest or hamper competition.
In fact, the primary drivers that made regulators approve the deal are to encourage telecom competition, increase investment in the wireless sector, and boost the combined entity to deploy the 4G LTE infrastructure with wider networks to fight bigger carriers.
A positive review
T-Mobile had earlier mentioned that the whole idea behind acquiring the pay-as-you-go carrier is to build the required strength to fight top players more effectively. It is about benefiting subscribers, enhancing spectrum capacity, and building an efficient network. The regulator is convinced that the tie-up is going to benefit subscribers at large and increase the competitive environment.
The merger would give T-Mobile the much needed weapon to emerge as a stronger player in this virtual duopoly market of Verizon and AT&T. The roll out of the national LTE network would greatly improve services offered to the subscribers. The regulators have pointed out some of the positives of the deal, which include the LTE network roll out program, better ‘quality of service’, PCS’ expansion in new markets, and eventually building a solid, fourth-largest national telecom carrier.
The FCC approval is a ‘significant milestone’ as stated by John Legere, Chief Executive of T-Mobile, but this is not all. The dawn is yet to break for the national carrier as another hurdle is on the way.
The final hurdle
While the watchdogs have given a go-ahead to the transaction, two major PCS investors have been critical of the deal. P. Schoenfeld Asset Management and Paulson & Co are working to block the merger, as they believe that Deutsche Telekom is overburdening the combined entity with too much debt, and that too at exorbitant interest rate.
This could turn the table for T-Mobile and PCS at the shareholders vote slated on April 12. Convincing these stakeholders becomes extremely crucial for the PCS, and so, it has requested shareholders to vote for the deal citing the benefits it would give them. In a letter, the Richardson-based carrier has supported the deal, explaining that this is the most suitable strategic move for the carrier and would be rewarding for them.
The regional carrier says that the joint entity is of much higher worth compared to the standalone company. In addition, PCS shareholders would profit considerably, as the deal is at 70% to 90% premium. PCS also explained that had T-Mobile not made the acquisition bid, the carrier’s share price would have been 19% down from current level. The $1.5 billion cash payment of the deal triggered the share price to its present levels. PCS has mentioned in the letter that the merged company would be better capitalized, and would be in a better position to combat larger rivals including Verizon, AT&T, and Sprint (NYSE: S).
It also said that all other arguments put forward by opposing parties are misleading and do not display the true picture. The highly competitive wireless market in the U.S. necessitates the carrier to undertake such strategic steps, which would not only answer its spectrum needs and improve customer offerings, but at the same time maximize shareholders' return. In the letter, PCS also dismissed allegations regarding huge debt as inaccurate information, stating that the joint entity’s debt terms are sound and not over-leveraged.
So where does the combined entity stand?
Taking on Verizon or AT&T now, or even in the near future, would be a mammoth task for the merged entity. However, overtaking Sprint would be easier. T-Mobile and MetroPCS together account for around 42.3 million customers against Sprint’s 55.6 million, which is not much of a difference considering the huge subscriber base difference with the top two biggies. With greater spectrum capacity and a solid network infrastructure, along with correct planning, the new entity could give Sprint tough competition for the third spot.
However, the fact that the Kansas-based carrier is awaiting its deal with Japan’s Softbank cannot be disregarded. Softbank would back Sprint with its big pockets and serve its financial requirement. In addition to this, Sprint has also struck a deal with spectrum rich Clearwire (NASDAQ: CLWR) to augment its spectrum holding, and possesses sufficient spectrum for its network overhaul.
To complicate the situation, Dish Networks made a premium counter-bid for Clearwire, but Sprint still stands a stronger chance. Clearwire is facing opposition from unhappy investors who are against Sprint’s $2.97 per share proposal which, they believe, undermines the company’s spectrum asset. However, the company has recommended its shareholders to accept Sprint’s deal. If both the Softbank and Clearwire deals work out for Sprint, the company would emerge as a tough contender for T-Mobile.
The U.S. mobile broadband service market is witnessing several interesting turn of events. While Sprint is working hard to challenge the top two, T-Mobile is paving its path to combat Sprint and overtake it to fight Verizon and AT&T. The wireless industry is strengthening with stronger competitors in the making. It would be interesting to watch how the telecom sector carriers are positioned in the market some years down the line.
Rajesh M. has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!