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MetroPCS Merger with T-Mobile Gets FCC Nod

DTEGY T VZ

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The much talked about MetroPCS Communications, Inc. and T-Mobile USA, subsidiary of Deutsche Telekom AG (DTEGY) merger has finally put an end to all anticipation by winning the Federal Communications Commission (FCC) approval.

The FCC green light casts a positive impact on the deal in respect of consumer and market competitiveness. We hope that it will play a pivotal role in shaping the network infrastructure of the combined company, bringing quality service to consumers.

Besides FCC, the proposed merger has been approved by Board of Directors of both, MetroPCS and Deutsche Telekom. However, the deal currently remains subject to MetroPCS shareholders’ approval, expected on Apr 12. 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 76%. The transaction process of the deal could be viewed as recapitalization of MetroPCS.

MetroPCS will issue a reverse stock split of 1:2 and pay cash of $1.5 billion to shareholders, which come approximately $4.09 per share prior to the reverse stock split. In addition, MetroPCS will acquire T-Mobile shares in totality in exchange for a 74% stake of its own 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 $5.5 billion backstop commitment for certain MetroPCS third-party financial dealings. If the deal materializes, MetroPCS will continue to trade in the U.S. market with the name changed to T-Mobile.

Beyond this, the deal is expected to result in accelerated financial growth with 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, Merger between MetroPCS and T-Mobile would boost their operation capabilities in the U.S. and safeguard the market share of these companies against rivals like AT&T, Inc. (T - Analyst Report) and Verizon Communications Inc. (VZ - Analyst Report).

Currently, MetroPCS and T-Mobile have over 9 million and 33 million subscribers, which combined, 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 upto 20x20 MHz of 4G LTE in several regions. T-Mobile would be able to benefit from MetroPCS’ superior market position in no contract wireless services, while MetroPCS will gain from T-Mobile’s advance B2B services and Mobile virtual network operator (MVNO) platform.

However, concerns still surround the future of the deal as it heads for the final roadblock – shareholder approval. Despite FCC’s approval, the merger faces condemnation by two major shareholders of MetroPCS – P. Schoenfeld Asset Management and Paulson & Co – both, having combined shareholding of approximately 11.56%.

The issues raised by these shareholders revolve around the level of debt the deal would impose upon merger. Further, they also remain miffed over the deal terms, which entitle 26% of the equity to MetroPCS shareholders as against 76% to T-Mobile USA. However, MetroPCS have tried to resolve these issues by urging shareholders to vote in favor of the deal.

The company issued a letter on Tuesday this week stating that the deal offers shareholders a 70% to 90% premium. In addition, the combined debt capital for the new company would be at similar levels compared to other big players in the industry and with historical average of MetroPCS.

MetroPCS has a Zacks Rank #3 (Hold).

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