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MetroPCS Communications, Inc. announced that it expects its shareholders to support the merger deal with T-Mobile USA, a subsidiary of Deutsche Telekom AG (DTEGY).  Market reports suggest that the company is expected to make a proxy filing with the Securities and Exchange Commission (SEC) in the near future on its merger deal with -Mobile USA.

The proposed agreement has been approved by the Board of Directors of both MetroPCS and Deutsche Telekom, but is yet to receive MetroPCS’ shareholders sanction as well as regulatory approvals along with other conditions. The deal is expected to close in the first half of 2013.

According to the deal terms, MetroPCS would be entitled to a 24% stake in the combined company and Deutsche Telekom would own the remaining 76% of the stake. The transaction process of the deal could be viewed as recapitalization of MetroPCS. MetroPCS will declare a 1-for-2 reverse stock split and pay $1.5 billion in cash to shareholders. This comes to approximately $4.09 per share prior to the reverse stock split. In addition, MetroPCS will acquire total T-Mobile shares in exchange of 74% of  its own stake transferred to Deutsche Telekom.

Under the deal terms, Deutsche Telekom will convert its existing inter-company debt into new $15 billion senior unsecured notes of the combined company and provide an unsecured revolving credit facility of $500 million to the combined company. Further, Deutsche Telekom will also facilitate the merged company’s operations with a $5.5 billion backstop commitment for certain MetroPCS third-party financial dealings. If the deal materializes, MetrPCS will continue to trade in the U.S. market with the name changed to T-Mobile.

Based on market estimates, the combined company is expected to have 2012 pro forma revenues of approximately $24.8 billion and cost synergies of $6-$7 billion. Further, in FY12 the combined operations are estimated to garner $6.3 billion in adjusted EBITDA and $2.1 billion in free cash flows alongside incurring estimated capital expenditures of $4.2 billion. Beyond this, the deal is expected to result in accelerated financial growth with an estimated five-year CAGR for revenues, EBITDA and free cash flow in the range of 3%-5%, 7%-10% and 15%-20%, respectively.

Apart from financial benefits, the merger between MetroPCS and T-Mobile would boost their operation capabilities in the U.S. Currently, MetroPCS and T-Mobile have over 9 million and 33 million subscribers, which combined together would form a subscriber base of more than 40 million for the combined company. Further, the deal would add to spectrum capacity and result in higher penetration of LTE networks that support speed of upto 20x20 MHz of 4G LTE in several regions. T-Mobile would be able to benefit from MetroPCS’ superior market position in a number of contract wireless services, while MetroPCS will gain from T-Mobile’s advance B2B services and Mobile virtual network operator (MVNO) platform.

Given all the transactional details and expected synergies, the deal looks lucrative for both MetroPCS and T-Mobile. However, there still remains a big unanswered question, which is regarding their effort to scale up the competitive ladder. The core reason behind this most awaited liaison is to safeguard their market share against rivals – like AT&T (T - Analyst Report) and Verizon Communications (VZ - Analyst Report) and Sprint Nextel Corp. (S - Analyst Report). How far the deal will be able to uplift the combined company’s struggling position and withstand the ever rising competition is something to watch out for.

We currently have our long-term Neutral recommendation on MetroPCS. For the short-term (1-3 months) the company retains a Zacks #3 Rank implying a short-term (1-3 months) Hold rating.

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