Paulson & Co., the biggest shareholder of MetroPCS Communications Inc. (PCS:US), said it may oppose the wireless carrier’s combination with Deutsche Telekom AG’s T- Mobile USA unit due to the debt the combined company would hold.
Paulson agrees with arguments presented by P. Schoenfeld Asset Management LP, which opposes the deal, according to an e-mailed statement yesterday. Paulson, which acquired 8 million shares of MetroPCS last quarter to boost its stake to 8.7 percent, is withholding its decision on whether to vote for the transaction until it sees the final proxy statement, it said.
The new company “has too much debt, the interest rate on Deutsche Telekom’s debt financing is too high, and the exchange ratio is too low for PCS stockholders,” said Paulson. “It may be more prudent for PCS to remain independent and explore other higher value alternatives.”
The deal, as presented in October, would give Germany’s largest phone company 74 percent of the combined business, and MetroPCS shareholders would get $1.5 billion in cash. Deutsche Telekom is trying to reinvigorate T-Mobile USA, the fourth- largest U.S. wireless carrier, which would add more subscribers and capacity from MetroPCS to compete with Verizon Wireless, AT&T Inc. and Sprint Nextel Corp.
MetroPCS shares are down (PCS:US) 25 percent since the merger was announced, a signal that investors aren’t optimistic about a higher offer. Since the Deutsche Telekom proposal, other companies that had explored a deal with Richardson, Texas-based MetroPCS have formed their own agreements, reducing the potential for competing counterbids.
Deutsche Telekom fell 1.7 percent to 8.33 euros at 10:30 a.m. in Frankfurt. MetroPCS was little changed (PCS:US) at $10.24 at yesterday’s close in New York, down from $13.57 on Oct. 2, the day before the transaction was announced. Bloomberg News reported Paulson’s comments after the close of trading.
P. Schoenfeld Asset Management, which owns 7.5 million shares, or about a 2 percent stake, is seeking to recruit fellow investors like Paulson to oppose the transaction. The New York- based investment firm demanded this week to see MetroPCS’s books so it can share details of the transaction with other holders and encourage them to join the opposition. The request follows a Jan. 30 letter to the boards of Deutsche Telekom and MetroPCS asking for changes to the deal.
“Shareholders deserve a capital structure that reflects reality in the marketplace and Deutsche Telekom’s confidence in the new T-Mobile/Metro PCS business plan,” Peter Schoenfeld, chairman and chief executive officer of P. Schoenfeld Asset Management, said in an interview. The firm, known as PSAM, managed $2.1 billion at the beginning of this year.
A Deutsche Telekom spokesman today didn’t immediately have a comment on Paulson’s position. The Bonn-based company last week reaffirmed its commitment to the deal in a statement. The combination of MetroPCS and T-Mobile USA will substantially benefit the shareholders and customers of both companies, it said.
“The MetroPCS board of directors believes that the proposed combination with T-Mobile is in the best interests of MetroPCS and all MetroPCS stockholders,” MetroPCS said yesterday in a statement.
One of the more onerous elements of the Deutsche Telekom deal, according to PSAM, is that it would leave the combined company with $15 billion in debt and an interest rate of as much as 8 percent.
Schoenfeld said he was “upset” with the financial burden this would put on the company. Cutting the level of debt or giving MetroPCS shareholders (PCS:US) a greater stake would be more fair to shareholders, he said. The objective, he said, is to get more shareholders to demand better terms for the deal or, if necessary, keep MetroPCS independent.
“I suspect Schoenfeld will not be alone,” said Jonathan Chaplin, a New York-based analyst with New Street Research LLP. “Other dissatisfied investors will probably oppose the deal.”
Without T-Mobile, Chaplin says MetroPCS is worth $10 a share. Under the current terms, the combined company may only be worth $7 to $8 a share, said Chaplin, who has a neutral rating on the stock.
“PCS shareholders are worse off for this deal,” Chaplin said. “And the debt is so large that if things don’t go according to plan, the equity value could evaporate quickly.”
Deutsche Telekom and MetroPCS need to cut the combined company’s debt (PCS:US) by about $6.6 billion, or 44 percent, to be fair to shareholders and to give the new wireless carrier a chance, Chaplin said.
While MetroPCS once had many suitors, finding a new buyer now could be difficult. Prior to accepting the Deutsche Telekom offer, the company had a frenzy of deal discussions with eight potential partners, it said in a November filing.
Sprint considered a $13.39 a share cash and stock offer for MetroPCS year ago, according to people familiar with the matter. Sprint has since moved on, offering $2.97 a share to buy out its wireless venture partner Clearwire Corp.
And Dish Network Corp. offered $11 a share, including $1.2 billion in cash, for MetroPCS. The offer was rejected, according to the filing. Dish, the U.S. satellite carrier, has also turned to Clearwire, offering $3.30 a share in a counterbid to Sprint.
Clearwire has also faced opposition from some shareholders over its agreement with Sprint. Crest Financial Ltd. and Mount Kellett Capital Management LP have lobbied for a better offer.
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