Deutsche Telekom's T-Mobile USA to merge with MetroPCS

By Phil Goldstein

Deutsche Telekom and flat-rate player MetroPCS (NYSE:PCS) agreed to merge DT's T-Mobile USA operations with MetroPCS. The action represents the second blockbuster attempt by DT to alter its U.S. strategy after AT&T's (NYSE:T) $39 billion acquisition of T-Mobile fell apart in late 2011.

The deal would combine T-Mobile's 33.2 million customers with MetroPCS' 9.3 million customers, and represents the latest major consolidation in the U.S. wireless industry. T-Mobile is the nation's fourth largest wireless carrier and MetroPCS is the nation's sixth largest wireless carrier. However, the combination of T-Mobile and MetroPCS won't create a carrier that is bigger than Sprint Nextel (NYSE:S), which counts around 56 million customers and is the nation's third largest wireless carrier.

The transaction is structured as a recapitalization, in which MetroPCS will declare a 1 for 2 reverse stock split, make a cash payment of $1.5 billion to its shareholders and acquire all of T-Mobile's capital stock by issuing to Deutsche Telekom 74 percent of MetroPCS' common stock on a pro forma basis. DT also will roll its existing intercompany debt into new $15 billion senior unsecured notes of the combined company, thereby providing the combined company with a $500 million unsecured revolving credit facility and a $5.5 billion backstop commitment.

Under the terms of the transaction, the combined company will be publicly traded and will retain the T-Mobile name. T-Mobile's new CEO John Legere will lead the company and J. Braxton Carter, currently CFO of MetroPCS, will be the CFO of the combined company. The company will operate T-Mobile and MetroPCS as separate customer units, led by Jim Alling, currently COO of T-Mobile, and Thomas Keys, currently COO of MetroPCS.

If the deal is approved, the company's headquarters will be in Bellevue, Wash., where T-Mobile is based, and it will retain a "significant presence" in Dallas, where MetroPCS is based.

Perhaps the most important part of the transaction involves the companies' spectrum. T-Mobile and MetroPCS said they plan to combine their respective LTE network buildouts, which they said will create "a path to at least 20x20 MHz of 4G LTE in many areas." Specifically, T-Mobile named New York, Dallas and Los Angeles as cities that would receive extra capacity. The companies said existing MetroPCS customers will be migrated to a common LTE-based network as they upgrade their handsets. T-Mobile has previously said it plans to launch LTE next year on its AWS spectrum. MetroPCS was the first major U.S. carrier to launch LTE, in 2010, and its LTE network currently works over its own AWS spectrum.

As for the combined company's services, T-Mobile hinted it would continue to offer a range of pricing and service options. Specifically, T-Mobile said it would "provide customers more choices, including an expanded selection of affordable products and services, such as contract, no-contract monthly, SIM-only, pay-as-you-go and mobile broadband, and our most compelling line up of devices--phones, tablets, hot spots, or other future networked devices."

T-Mobile also said the deal will aid it in its efforts to improve its business-to-business sales and would bolster its MVNO business.

The deal comes shortly after DT named John Legere as the new CEO of T-Mobile USA, who said he would be focused on growing the carrier's business, which has lost 1.7 million postpaid customers over the past 12 months to June 30. The deal's announcement also comes less than a week after T-Mobile sold the rights to 7,200 of its wireless towers to Crown Castle for $2.4 billion. DT said last week it would use part of those proceeds for "funding of growth investments," including T-Mobile's challenger brand strategy.

The proposed merger leaves Sprint Nextel (NYSE:S) on the outside. Sprint's stock has surged this year, stoking speculation among financial analysts that the carrier would make a deal. Sprint is in the middle of a complicated multibillion-dollar network modernization plan called Network Vision.

Sprint CEO Dan Hesse said last month the carrier would likely be a part of any significant M&A going forward, though he did not provide specifics. "I do think there will be consolidation," he said at an investor conference. "I would hope and expect that over the long term Sprint will take a very active role in that." Sprint's board reportedly nixed a merger with MetroPCS in February.

As with the proposed AT&T merger, a major question will be whether the deal will be approved by regulators at the Department of Justice and the FCC. Some analysts think that because of the smaller scale of the companies--T-Mobile had 33.2 million customers at the end of the second quarter and MetroPCS had 9.3 million--that the deal will receive less regulatory scrutiny than the AT&T/T-Mobile deal did. The two companies have complementary 1900 MHz PCS and 1700 MHz AWS spectrum holdings and the merger would not remove a Tier 1 national player from the market, as would have been the case with AT&T/T-Mobile.

T-Mobile said it expects its deal with MetroPCS to close in the first half of 2013.

The AT&T/T-Mobile deal was announced in March 2011 with both sides declaring confidence that the deal would be approved. However, the DOJ sued to block that merger on antitrust grounds the FCC signaled its opposition as well, forcing DT and AT&T to cancel the deal late last year. Sprint, smaller carriers and many public interest groups strongly opposed the AT&T/T-Mobile deal.

An unnamed source close to the FCC told the Wall Street Journal that a merger between MetroPCS and T-Mobile was likely to be approved relatively quickly.

Blair Levin, a former FCC chief of staff who is now a fellow at the Aspen Institute, told the Journal  that the proposed merger with MetroPCS vindicates regulators' strategy of keeping it alive as an independent company. "If I were sitting in the [Department of Justice] right now I would say this completely justifies what we did," Levin said.

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