Paulson & Co., the biggest investor in MetroPCS Communications Inc. (PCS:US), will vote to block the wireless carrier’s merger with Deutsche Telekom AG’s (DTE) T-Mobile USA because the combined company would hold too much debt.
“While we believe in the strategic merits of the proposed combination, Paulson believes the proforma company has too much debt at too high an interest rate to be competitive in the well- capitalized U.S. wireless industry,” the firm, founded by billionaire John Paulson, said yesterday in a statement.
Paulson & Co.’s opposition throws into question the plan by Deutsche Telekom to take 74 percent of the combined business, with MetroPCS shareholders getting $1.5 billion in cash. Germany’s largest phone company is trying to reinvigorate T- Mobile USA, the fourth-biggest U.S. wireless carrier, which would add more subscribers and capacity from MetroPCS to compete with Verizon Wireless, AT&T Inc. (T:US) and Sprint Nextel Corp. (S:US)
MetroPCS shares are down (PCS:US) 20 percent since the merger was announced Oct. 3, a signal that investors aren’t optimistic about the transaction. Since the Deutsche Telekom proposal, some companies that had explored a deal with Richardson, Texas-based MetroPCS have formed other agreements, reducing the potential for competing counterbids.
MetroPCS rose less than 1 percent to $9.84 at 10:12 a.m. in New York. Deutsche Telekom fell 2 percent to 8.06 euros in Frankfurt.
The combined company would hold $23.2 billion debt, including capital leases, with $15 billion owed to Deutsche Telekom, Paulson & Co. said in a letter to MetroPCS’s board. Paulson & Co. said that would put MetroPCS’s net debt at 3.6 times 2013 earnings, more than double the ratio (VZ:US) of the next most-leveraged competitor, Verizon Communications Inc. (VZ:US), the majority owner of Verizon Wireless.
MetroPCS currently has $2 billion of bonds outstanding with an average coupon of 7.25 percent, according to data (PCS:US) compiled by Bloomberg. The debt is equally split between notes maturing in 2018 and 2020.
Paulson & Co. added 8 million shares of MetroPCS in the fourth quarter for a total of 31.8 million. It also acquired shares representing a 4.3 percent stake in Sprint, the third- largest U.S. wireless carrier.
John Paulson is worth about $11 billion, according to the Bloomberg Billionaires Index. He has told clients he’s focusing on event-driven investing this year after losses on wrong-way bets on the U.S. and European economies over the previous two years left the firm with $18 billion in assets, down from a peak of $38 billion in 2011. Event-driven managers bet on companies facing mergers, spinoffs and bankruptcies.
P. Schoenfeld Asset Management, which represents holders of 8.5 million shares, or about a 2.3 percent of the company’s stock, has also said it is opposing the merger.
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. (CLWR:US)
And Dish Network Corp. (DISH:US) offered $11 a share, including $1.2 billion in cash, for MetroPCS, according to a person familiar with the matter. The offer was rejected, according to the filing. Dish, the U.S. satellite carrier, is also vying for 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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