Marriage of Convenience

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Merging for Strength

Struggling cellphone companies T-Mobile USA (privately held) and MetroPCS Communications (NYSE: TMUS) are set to merge, in a deal that will create an operator with more than 40 million subscribers. T-Mobile USA and MetroPCS have announced they will merge in a move to combine two weaker wireless companies in an industry dominated by bigger players.

T-Mobile's parent company, Deutsche Telekom, announced that it has signed an agreement to "combine" T-Mobile and MetroPCS. "This transaction will create the leading value carrier in the U.S. wireless marketplace, which will deliver an enhanced customer experience through a wider selection of affordable products and services, deeper network coverage and a clear-cut technology path to one common LTE network," Deutsche Telekom said in a statement.

T-Mobile, with 33.2 million mobile customers, is the nation's fourth-largest cellphone company; MetroPCS is the fifth with 9.3 million customers. Based on analyst consensus estimates for 2012, the combined company is expected to have roughly 42.5 million subscribers, $24.8 billion of revenue, $6.3 billion of adjusted EBITDA, $4.2 billion of capital expenditures and $2.1 billion of free cash flow in 2012. MetroPCS' shares shot up some 20 percent to $14.16 in New York on Tuesday.

In a joint statement, the two companies said Wednesday that Deutsche Telekom AG will hold 74 percent of the new business, while MetroPCS' shareholders will hold the remainder, as well as receiving a payment of about $1.5 billion.

Regulators are Watching

It is no secret that Deutsche Telekom was looking to sell off T-Mobile USA, hence the attempted deal with AT&T (NYSE: T) back in 2011, which is why we guess this particular bit of news isn’t too surprising. Last year, AT&T struck a deal to buy T-Mobile USA for $39 billion for much the same reason. That was shot down by regulators, who believed competition would suffer if the second-largest cellphone company were to gobble up the fourth-largest. The regulatory concerns this time around appear set to be much milder than the proposed deal involving AT&T. Both companies are relatively small, and T-Mobile USA has been losing subscribers for the last two years. The companies expect the deal to close in the first half of 2013, subject to regulatory approval.

Back in February, T-Mobile announced plans to roll out its 4G LTE network in 2013, thanks in part to the Advanced Wireless Services (AWS) spectrum it gained from the failed AT&T merger deal as well as a $4 billion investment.

The effort has been dubbed T-Mobile's "Challenger Strategy" and is expected to reach the "vast majority" of the top 50 markets. The carrier has been installing new equipment at 37,000 cell sites and refarming spectrum in preparation for the LTE launch. Recently, the Federal Communications Commission approved a deal whereby T-Mobile and Verizon Wireless will purchase and swap spectrum in the AWS band.

Both T-Mobile and MetroPCS emphasize cost savings and are friendly to users who don't want long-term contracts. All MetroPCS plans are contract-free, and T-Mobile offers a monthly discount to users who pay full price for their phones. The two carriers have also both embraced unlimited data. In September, they both started offering unlimited data plans with no speed limits, though the offer from MetroPCS is for a limited time only. As AT&T and Verizon Wireless work to squash unlimited data plans, the combined T-Mobile and MetroPCS may push themselves as a cheaper, viable alternative.

Even the Big Brothers are Watching

All the industry stalwarts, including AT&T, Sprint and Verizon, declined to comment on the deal.

In order to run in the marathon of competition, AT&T, the leader, announced that beginning Oct. 7, its smartphone customers will have a new rate plan option.  The new Monthly Unlimited Plan with Data offers unlimited talk and text, with 1 GB of data for $65 per month.  Unlimited text messaging to Mexico, Canada and over 100 other countries is also included. This new plan is specially designed for smartphone users, and saves them $10 per month compared to previously available options.

The company also announced that it declared a quarterly dividend of $0.44 a share on the company’s common shares. The dividend is payable on Nov. 1 to stockholders of record at the close of business on Oct. 10. 

Meanwhile Sprint Nextel (NYSE: S) announced in September availability of 4G LTE to customers in Lawrence, Kan.; Topeka, Kan.; Wichita, Kan.; Waukegan-Lake County, Ill.; and Barnstable-Hyannis/Mid-Cape, Mass. Sprint’s wireless customers in these metro areas will benefit from the speed, value and simplicity of the Sprint 4G LTE experience. Through its exceptional selection of smartphones and a unlimited data plan, Sprint offers an unbeatable package for wireless users.

Additionally, the 2012 American Customer Satisfaction Index ranked Sprint No. 1 among all national carriers in customer satisfaction and most improved, across all 47 industries, during the last four years.

The other market biggie, Verizon Communications (NYSE: VZ), has been trying to distance itself from unlimited plans for quite some time now. The company had stopped offering unlimited plans to new subscribers a year ago, and more recently stopped its unlimited users from availing handset subsidies if they choose to keep their plans.

The company had also declared a quarterly dividend of $0.515 per outstanding share, an increase of $0.015 per share, or 3.0%, from the previous quarter. On an annual basis, this increases Verizon's dividend $0.06 per share, from $2.00 to $2.06 per share. The quarterly dividend is payable on Nov. 1 to Verizon Communications shareowners of record at the close of business on Oct. 10. 

The comparison

<table> <tbody> <tr> <td> <p><strong>Direct Competitor Comparison</strong></p> </td> <td> <p><strong> </strong> </p> </td> </tr> </tbody> </table>
<table> <tbody> <tr> <td> <table> <tbody> <tr> <td> </td> <td> <p><strong>AT&T Inc</strong><strong></strong></p> </td> <td> <p><strong>Sprint Nextel Corporation</strong></p> </td> <td> <p><strong>T-Mobile</strong></p> </td> <td> <p><strong>Verizon Communications Inc.</strong><strong></strong></p> </td> <td> <p><strong>Industry</strong></p> </td> </tr> <tr> <td> <p>Market Cap:</p> </td> <td> <p>220.09B</p> </td> <td> <p>15.09B</p> </td> <td> <p>N/A</p> </td> <td> <p>131.62B</p> </td> <td> <p>768.59M</p> </td> </tr> <tr> <td> <p>Employees:</p> </td> <td> <p>242,380</p> </td> <td> <p>40,000</p> </td> <td> <p>34,518<sup>1</sup></p> </td> <td> <p>188,200</p> </td> <td> <p>3.05K</p> </td> </tr> <tr> <td> <p>Qtrly Rev Growth (yoy):</p> </td> <td> <p>0.00</p> </td> <td> <p>0.06</p> </td> <td> <p>N/A</p> </td> <td> <p>0.04</p> </td> <td> <p>0.06</p> </td> </tr> <tr> <td> <p>Revenue (ttm):</p> </td> <td> <p>127.38B</p> </td> <td> <p>34.63B</p> </td> <td> <p>19.90M<sup>1</sup></p> </td> <td> <p>113.14B</p> </td> <td> <p>1.39B</p> </td> </tr> <tr> <td> <p>Gross Margin (ttm):</p> </td> <td> <p>0.55</p> </td> <td> <p>0.42</p> </td> <td> <p>N/A</p> </td> <td> <p>0.60</p> </td> <td> <p>0.55</p> </td> </tr> <tr> <td> <p>EBITDA (ttm):</p> </td> <td> <p>35.50B</p> </td> <td> <p>4.91B</p> </td> <td> <p>N/A</p> </td> <td> <p>30.90B</p> </td> <td> <p>304.22M</p> </td> </tr> <tr> <td> <p>Operating Margin (ttm):</p> </td> <td> <p>0.14</p> </td> <td> <p>0.01</p> </td> <td> <p>N/A</p> </td> <td> <p>0.13</p> </td> <td> <p>0.16</p> </td> </tr> <tr> <td> <p>Net Income (ttm):</p> </td> <td> <p>4.43B</p> </td> <td> <p>-3.84B</p> </td> <td> <p>N/A</p> </td> <td> <p>2.87B</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p>EPS (ttm):</p> </td> <td> <p>0.75</p> </td> <td> <p>-1.28</p> </td> <td> <p>N/A</p> </td> <td> <p>1.01</p> </td> <td> <p>0.54</p> </td> </tr> <tr> <td> <p>P/E (ttm):</p> </td> <td> <p>50.93</p> </td> <td> <p>N/A</p> </td> <td> <p>N/A</p> </td> <td> <p>45.79</p> </td> <td> <p>43.53</p> </td> </tr> <tr> <td> <p>PEG (5 yr expected):</p> </td> <td> <p>1.61</p> </td> <td> <p>-0.58</p> </td> <td> <p>N/A</p> </td> <td> <p>1.71</p> </td> <td> <p>2.25</p> </td> </tr> <tr> <td> <p>P/S (ttm):</p> </td> <td> <p>1.71</p> </td> <td> <p>0.42</p> </td> <td> <p>N/A</p> </td> <td> <p>1.15</p> </td> <td> <p>1.32</p> </td> </tr> </tbody> </table> </td> </tr> </tbody> </table>

The Verdict

T-Mobile and MetroPCS have two things in common: they use the same spectrum bands and they’re both coalescing around LTE as their future network technologies, which again would take a long time to synchronize. T-Mobile won’t launch LTE until 2013, and while MetroPCS has had 4G live since 2010, the vast majority of its subscriber base is still on its CDMA network. In case the merged company plans a joint CDMA-GSM operation for years to come, it would mean enduring many years of operational hell and likely financial losses trying to juggle two separate sets of customers and managing three separate networks.

And it will still need to make major investments to expand its LTE network across the country to match the offerings of Verizon, AT&T, and Sprint. MetroPCS' high-speed network covers markets in dense parts of the country like Southern California and the Northeast. This merger could present an opening for other carriers like Sprint to lure T-Mobile customers. But the deal would leave Sprint caught between a strengthened T-Mobile and big brothers AT&T and Verizon.

Ultimately it's the consumers who is going to gain the most from the intense competition between the major telecom players and with the rising demand and usage, the telecom stocks are bound to soar.

SomnathGuha has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. If you have questions about this post or the Fool’s blog network, click here for information.

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