Deutsche Telekom AG (DTE) got a chance to stage a comeback in the U.S. after MetroPCS Communications Inc. (PCS:US) shareholders approved a sweetened deal to merge with the German company’s T-Mobile USA unit.
Combining the fourth- and fifth-biggest U.S. wireless companies creates a carrier with more than 40 million customers and gives T-Mobile airwave licenses needed to offer fast services to rival AT&T Inc. (T:US) and Verizon Wireless. The companies plan to close the deal May 1.
For Deutsche Telekom Chief Executive Officer Rene Obermann, the transaction provides firmer footing for the U.S. business, which has lost 13 percent of its contract customer base between 2009 and 2012. The new T-Mobile will be publicly traded, facilitating an eventual withdrawal from the U.S., people familiar with Obermann’s plans have said.
“We’re very happy and also relieved that we finally got this solution,” Obermann said in a video statement yesterday. “Not only because we finally have clarity -- as we all know, uncertain situations are never comfortable for anyone involved. Most of all, I’m happy that we can finally get going.”
For Obermann, who after seven years as CEO will be succeeded by Chief Financial Officer Timotheus Hoettges at the end of the year, the deal was probably his last chance to find a solution to the U.S. business that long eluded him. A $39 billion deal to sell T-Mobile to Dallas-based AT&T fell through in 2011 because regulators were concerned the combination would hurt competition.
With T-Mobile USA’s fate clarified, Hoettges will have to divert less attention away from the carrier’s European markets, where the economic crisis, rising competition and regulation- driven price cuts have caused revenue to decline.
In its home market, Deutsche Telekom is facing increasing pressure from cable companies such as John Malone’s Liberty Global Inc. (LBTYA:US) that are attracting Internet and phone customers.
Kabel Deutschland Holding AG, Germany’s largest cable company, has attracted interest from Liberty Global and Vodafone Group Plc (VOD), which also competes with Deutsche Telekom for the top spot in the country’s wireless market.
Deutsche Telekom rose 0.8 percent to 9.03 euros at the close in Frankfurt. MetroPCS, based in Richardson, Texas, advanced (PCS:US) 1.5 percent to $11.95 in New York.
Bowing to shareholder pressure, Deutsche Telekom on April 10 agreed to lower the size and interest rate of a loan to the joint company. The improved merger terms, which cut the shareholder loan to $11.2 billion from $15 billion and trimmed the interest rate by half a percentage point, won the endorsement of MetroPCS’s largest investor, Paulson & Co., as well as two shareholder-advisory firms in the run-up to the vote.
The deal gives Deutsche Telekom a 74 percent stake in the merged entity and MetroPCS shareholders a $1.5 billion cash payment. Deutsche Telekom has agreed not to sell the shares for 18 months.
For Deutsche Telekom shareholders, the approval is “good news, because you could never really be certain until the last moment,” said Alexandre Iatrides, an analyst at Oddo & Cie. in Paris who recommends buying Deutsche Telekom shares. “It’s one step, but it’s not enough.”
T-Mobile has lagged behind peers in constructing faster networks and offering Apple Inc. (AAPL:US)’s iPhone. Since T-Mobile began to offer the device this month, Chief Executive Officer John Legere is challenged with proving his strategy of scrapping long-term contracts will win back subscribers.
The carrier, which has earmarked network investments of $4.8 billion this year, last month switched on its own high- speed service using the long-term evolution technology.
MetroPCS has been struggling to compete on its own. Yesterday, the company reported first-quarter earnings after the market close. Net income fell 8 percent to $19.7 million, or 5 cents a share. Revenue rose 1 percent to $1.29 billion. And the carrier added 109,000 new pay-as-you-go customers in the quarter for a total of 9 million subscribers.
“We voted for it because we were happy to see that Deutsche Telekom realized the value contribution MetroPCS made to the combined companies,” said Roy Behren, who co-manages the $4.7 billion Merger Fund at Westchester Capital in Valhalla, New York. “We look forward to having another strong competitor in the wireless industry.”
The pace of consolidation in the U.S. is picking up. The future of Verizon Wireless has become a focus among investors since Bloomberg News reported on March 5 that Verizon Communications Inc. (VZ:US) wants to buy out Vodafone’s stake in their partnership this year. Vodafone’s 45 percent holding is worth about $115 billion, analysts said.
Dish Network Corp. (DISH:US) last week offered $25.5 billion for Sprint Nextel Corp., the nation’s third-biggest mobile-phone carrier, beating terms offered by Japan’s SoftBank Corp. (9984) in October.
“Since there are two companies bidding for Sprint, one of them will be disappointed and may come back for T-Mobile,” Oddo’s Iatrides said.
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