Deutsche Telekom AG (DTE) is discussing a merger of its T-Mobile USA unit with MetroPCS Communications Inc. (PCS:US) as it reviews options for the customer-losing business, according to people familiar with the matter.
Deutsche Telekom is considering a stock-swap transaction that would give the German company control over the combined entity, which would be publicly listed, said two of the people, who declined to be identified because the talks are private. Other options include an initial public offering or an outright sale of T-Mobile USA, the people said, adding that Deutsche Telekom is also in talks with other companies. MetroPCS shares jumped 14 percent in New York trading yesterday.
Europe’s second-biggest phone company, whose $39 billion sale of T-Mobile USA to AT&T Inc. (T:US) failed last year due to regulatory resistance, wants to bolster the business’s ability to gain size and customers, the people said. Following the deal’s collapse in December, T-Mobile USA has cut jobs and stepped up investments in faster networks as it tries to stop a flight of contract subscribers to rivals.
“The thing they lack is size and it would be easier to be part of something larger,” said Alexandre Iatrides, an analyst at Oddo & Cie. in Paris who recommends investors reduce their holdings in Bonn, Germany-based Deutsche Telekom.
T-Mobile USA lost 510,000 contract clients last quarter. New prepaid users helped boost the total customer base to 33.4 million at the end of March. T-Mobile USA is the fourth-largest wireless provider in the country, behind Verizon Wireless, AT&T and Sprint.
First-quarter earnings before interest, taxes, depreciation and amortization at the unit climbed 8 percent to $1.29 billion, Deutsche Telekom said today.
Combining with a smaller player “isn’t really the option they prefer, but they don’t really have a choice” after the disposal plan failed, Iatrides said, adding that Sprint Nextel Corp. (S:US) could be a viable, alternative partner.
MetroPCS shares climbed 94 cents to $7.50 yesterday. Leap Wireless International Inc. (LEAP:US), MetroPCS’s main rival in the pay- as-you-go market, rose 12 percent to $5.76. The two companies often trade in tandem, and Leap may be expected to benefit from consolidation in the industry.
Deutsche Telekom may also need to acquire Leap to complement its coverage in the U.S., UBS AG analyst John Hodulik wrote in note to clients.
Deutsche Telekom shares gained as much as 4.2 percent to 8.90 euros today, the biggest intraday jump since November. They were up 3.4 percent as of 1:16 p.m. in Frankfurt.
Sprint discussed buying T-Mobile USA last year, people familiar with the talks said at the time. It also abandoned a plan to buy MetroPCS, people with knowledge of those discussions said in February. Sprint is on the lookout for deals that would help it pose a more credible threat to bigger competitors Verizon Wireless and AT&T.
A combination of T-Mobile USA and MetroPCS wouldn’t alleviate spectrum constraints the two companies are facing, and the integration of their different wireless standards would be a “logistical nightmare,” Sanford C Bernstein’s London-based analyst Robin Bienenstock wrote in a note today. T-Mobile’s network uses the GSM standard, while MetroPCS’s is based on the code-division multiple access technology.
Deutsche Telekom Chief Executive Officer Rene Obermann said during a conference call today that he won’t comment on “rumors” regarding the company’s U.S. business.
MetroPCS representative Drew Crowell and Sprint’s Bill White also declined to comment.
MetroPCS had been the front-runner to buy assets from AT&T and T-Mobile when the two companies sought to complete their deal, people familiar with the matter said last year.
The current negotiations with Deutsche Telekom had been complicated by a 24 percent decline (PCS:US) by MetroPCS shares this year before yesterday, and the talks still might fail, the person said. The stock drop, partly wiped out by yesterday’s gain, may require the companies to adjust the ratio between their respective contributions.
MetroPCS is also in discussions with other potential partners, the people said.
Deutsche Telekom’s wireless U.S. business lost 1.65 million contract customers last year, or 6.2 percent of its base of highest-paying users. The division’s bet on devices running Google Inc. (GOOG:US)’s Android system failed to stem customer losses as Verizon Wireless, AT&T and Sprint lured away users with Apple Inc. (AAPL:US)’s iPhone.
Verizon Wireless added 501,000 contract customers in the first quarter, while AT&T netted 187,000. Sprint added users for its main brand, though it lost a total of 192,000 contract users for all its services. MetroPCS, based in Richardson, Texas, reported a quarterly gain of 132,000 new customers.
Deutsche Telekom today reported earnings and revenue that topped analysts’ estimates as profitability in the U.S. improved and a slowdown in the European business stabilized.
In March, T-Mobile USA said it was cutting 1,900 jobs and closing seven of its 24 call centers to adjust costs to a shrinking customer base. Deutsche Telekom has said it is looking at other strategic options, including a sale of T-Mobile’s U.S. tower network.
AT&T and Deutsche Telekom both agreed to abandon the T- Mobile USA deal, which would have created the largest U.S. mobile-phone operator. Deutsche Telekom cited unwillingness by the U.S. Justice Department and the Federal Communications Commission to change their “non-supportive stance” even after the companies proposed changes to the size and structure of the transaction. The Justice Department had sued to block the deal.
U.S. regulatory agencies likely would approve a combination of T-Mobile and MetroPCS, said Jeffrey Silva, a Washington-based analyst with Medley Global Advisors LLC.
“Such a transaction is probably the precisely the kind of merger the Obama administration would welcome as a limited counterbalance to wireless juggernauts Verizon and AT&T,” Silva said in an e-mail.
When the Justice Department sued to block AT&T from buying T-Mobile last year, it said in a complaint that the smaller company is an “aggressive competitor” that helps constrain prices across the wireless marketplace.
Verizon Wireless and AT&T serve about 60 percent of U.S. wireless subscribers, according to data compiled by Bloomberg. T-Mobile accounts for 9.5 percent, and MetroPCS has 2.7 percent.
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