Bloomberg News

T-Mobile’s MetroPCS Merger Rejected by Advisory Firm ISS

March 29, 2013

MetroPCS Investors See ISS as Tiebreaker in T-Mobile Merger Vote

MetroPCS Communications Inc. could go it alone, though it’s increasingly difficult to compete with the major carriers. Photographer: David Paul Morris/Bloomberg

Institutional Shareholder Services Inc., an investor advisory firm, recommended against T-Mobile USA Inc.’s merger with MetroPCS Communications Inc. (PCS:US), dealing a blow to a transaction that lacks the support of MetroPCS’s biggest owner.

ISS said it opposed the deal because of unfavorable terms and the potential for MetroPCS to thrive as an independent company. MetroPCS could bolster its network by acquiring more wireless airwaves and it may be the target of additional merger offers in the future, the Rockville, Maryland-based firm said in a report. Investors are slated to vote on the proposed combination on April 12.

“The question remains, ‘Why now?’” ISS said. “Absent merging with T-Mobile, PCS will still have $1.5 billion of cash (PCS:US) to dedicate to new spectrum in some way and could continue operating as a stand-alone company.”

Paulson & Co. -- MetroPCS’s largest investor, with almost 10 percent of shares outstanding -- has come out against the deal, as has smaller shareholder (PCS:US) P. Schoenfeld Asset Management. Madison Dearborn Partners LLC, the second-largest owner, is backing the merger.

Critics suggest the merger will load up the new company with too much debt (PCS:US), while supporters say it’s the best way for MetroPCS to compete with larger carriers. The complexity of the proposal -- a reverse merger creating a publicly traded business that’s 74 percent owned by T-Mobile parent Deutsche Telekom AG (DTE) - - may prompt investors to rely more heavily on shareholder- advisory firms, said Michael Mahoney, senior managing director at Falcon Point Capital LLC in San Francisco.

‘More Important’

“Because of the unique structure of this deal, ISS’s decision is more important,” said Mahoney, who doesn’t own shares in either MetroPCS or Deutsche Telekom.

ISS has held sway in high-profile takeover votes before. In 2002, the firm advocated for the $22.3 billion combination of Hewlett-Packard Co. (HPQ:US) and Compaq Computer Corp. The deal was approved over the opposition of Hewlett-Packard board member Walter Hewlett.

The merger is “strategically compelling,” Glass, Lewis & Co., another advisory firm, said in a report sent by e-mail yesterday. “MetroPCS and T-Mobile make for a strong strategic, technological and cultural fit. The transaction addresses MetroPCS’ challenges of obtaining additional spectrum, more subscribers, a larger network footprint and a stronger platform for future growth.”

MetroPCS’ Contribution

Still, San Francisco-based Glass Lewis said shareholders shouldn’t be satisfied with the agreement because it “appears to undervalue MetroPCS’ contribution to the combined company.”

The proposal would unify the fourth- and fifth-largest U.S. wireless carriers, and it represents a key part of Deutsche Telekom’s effort to stage a U.S. comeback. Its T-Mobile division ranks a distant No. 4 to Verizon Wireless, AT&T Inc. (T:US) and Sprint Nextel Corp. (S:US), and it lost 2.1 million monthly contract subscribers last year.

Deutsche Telekom remains convinced that the deal will benefit both carriers’ shareholders and that it will be approved on April 12, said Philipp Kornstaedt, a spokesman for the Bonn- based company. He declined to say whether Deutsche Telekom may offer improved terms to MetroPCS shareholders.

To bounce back, T-Mobile announced plans this week to offer the iPhone for the first time and introduced new payment plans that let customers avoid the industry’s typical long-term contracts. At the event, T-Mobile’s chief executive officer, John Legere, said he was sure the MetroPCS deal would succeed and criticized the hedge funds opposing the plan.

Legere said at the time that he had met with ISS and came away confident about the merger’s prospects.

‘Greedy’ Funds

“It will be approved, despite the greedy hedge funds,” said Legere, who joined Bellevue, Washington-based T-Mobile in September. “I’m confident because it makes huge sense. And the alternatives for MetroPCS are a bit fictitious.”

Still, critics have balked at the terms. Deutsche Telekom, Germany’s largest phone company, would own almost three-quarters of the new business after making a $1.5 billion cash payment to MetroPCS shareholders. The German company also would loan $15 billion to the entity. The resulting level of debt -- and the relatively high, 7 percent projected interest rate -- would be a heavy burden, according to P. Schoenfeld Asset Management and other opponents.

“If anyone is being greedy here, it is Deutsche Telekom,” Paulson & Co. said in a statement. “While we support industry consolidation, the current proposal is a bad deal for MetroPCS shareholders. We believe MetroPCS is worth more as a stand-alone company.”

Deal Valuation

The way the deal is structured, the combined company would be valued at $7 to $8 a share, said Jonathan Chaplin, a New York-based analyst at New Street Research. That compares with MetroPCS’s closing share price of $10.90 yesterday. Shares of the Richardson, Texas-based company have fallen 20 percent since Oct. 2, the day before the merger was announced, signaling that investors are unhappy with the terms.

Deutsche Telekom rose 0.4 percent to 8.25 euros at the close in Frankfurt yesterday.

“The deal will be tough to get done,” said Kevin Smithen, an analyst with Macquarie Securities USA Inc. in New York. “The opposition goes well beyond the publicly identified activist shareholders.”

Possible Sweetener

Deutsche Telekom could improve its chances by sweetening the offer, perhaps by cutting the new company’s debt by several billion dollars, he said.

“This would help the valuation of the new company,” said Smithen, who has the equivalent of a buy rating on MetroPCS.

Beyond that possibility, MetroPCS may have few additional options. The company said this week that no other bidders have emerged willing to counter T-Mobile’s offer.

MetroPCS could go it alone, though it’s increasingly difficult to compete with the major carriers. Analysts estimate that the company’s revenue will drop 1 percent to $5.07 billion this year, while net income slides 36 percent, according to data compiled by Bloomberg.

MetroPCS’s board (PCS:US) approved the merger and has urged a yes vote so the carrier can mount a stronger challenge to the top carriers -- even if the new company would still be relatively small. The combination would create a carrier with 42.3 million customers, less than half the size of Verizon Wireless or AT&T.

Data Demand

The deal moved a step closer to completion on March 12, when both the Federal Communications Commission and the Department of Justice approved the transaction. The following week, the Committee on Foreign Investment in the U.S. signed off on the arrangement.

The merger also received the endorsement of Egan-Jones Proxy Services, which issued a report earlier this week. The Haverford, Pennsylvania-based firm said the combination would increase the size and quality of the carrier’s wireless coverage and help it respond to growing demand for faster mobile-data services.

MetroPCS’s combination with T-Mobile is a good idea in principle, so long as the terms are right, Smithen said. As for the ISS report, the firm’s advice may influence investors who haven’t yet made up their minds, he said.

“It might sway the undecided,” he said.

To contact the reporters on this story: Scott Moritz in New York at smoritz6@bloomberg.net; Olga Kharif in Portland at okharif@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net


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