MetroPCS Communications Inc. (PCS:US) jumped the most in two months after advisory firm Institutional Shareholder Services Inc. urged investors to block its merger with T-Mobile USA Inc., raising the prospect of a better offer.
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 to dedicate to new spectrum in some way and could continue operating as a stand-alone company.”
MetroPCS, based in Richardson, Texas, rose 3.5 percent to $10.90 at the close in New York, the biggest increase since Jan. 10. Deutsche Telekom AG (DTE), T-Mobile’s parent company, climbed 0.4 percent to 8.25 euros in Frankfurt.
Shareholders are being asked to approve a reverse merger, creating a publicly traded business that’s 74 percent owned by Deutsche Telekom -- and that has $23.2 billion in debt, including capital leases. Deutsche Telekom could improve its chances by sweetening the offer, perhaps by cutting the new company’s debt by several billion dollars, said Kevin Smithen, an analyst at Macquarie Securities USA Inc. in New York.
“This would help the valuation of the new company,” said Smithen, who has the equivalent of a buy rating on MetroPCS.
To underscore the strength of the deal, MetroPCS pointed to a report earlier this week from Egan-Jones Proxy Services that endorsed the combination as the best strategic alternative for the company. “We strongly believe that ISS’s report contains material flaws and reaches the wrong conclusion,” MetroPCS said in a statement today.
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.
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.
Paulson & Co. -- MetroPCS’s largest investor, with almost 10 percent of shares outstanding -- has come out against the deal, as has smaller shareholder P. Schoenfeld Asset Management. Madison Dearborn Partners LLC, the second-largest owner, is backing the merger.
Another shareholder, Westchester Capital Management Inc., inserted itself in the fray today. Its Merger Fund (MERFX:US) filed suit against MetroPCS, seeking a court order from a federal judge to delay the April 12 vote. Westchester has a 3.3 percent stake in MetroPCS, according to data compiled by Bloomberg.
The complexity of the proposal 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.
“Because of the unique structure of this deal, ISS’s decision is more important,” said Mahoney, who owns shares in neither MetroPCS nor 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.
Glass, Lewis & Co., another advisory firm, also is preparing a report on the tie-up between T-Mobile and MetroPCS. Its findings will be released as soon as today, said Jaron Schneider, a spokesman for the San Francisco-based firm.
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 (T:US) Inc. and Sprint Nextel Corp. (S:US), and it lost 2.1 million monthly contract subscribers last year.
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 combative 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.
“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 yesterday 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.”
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.
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.
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.
MetroPCS’s combination with T-Mobile is a good idea in principle, so long as the terms are right, said Smithen of Macquarie. 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.
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